New Frontier research does not find evidence that publicly listed firms are short-termist based on analysis of investment patterns.
Are publicly listed companies more short-termist? This is a common concern, often based on assumptions that listed firms focus on dividends to shareholders, or boosting short-run stock prices because of incentives in executive pay, rather than investing and planning for the longer-term. However, Frontier research published today on behalf of the Department for Business, Energy and Industrial Strategy does not find evidence consistent with the short-termism hypotheses in the UK.
The analysis is based on a unique firm-level investment dataset compiled from tax records matched with other sources of firm-level demographic information. Drawing on a final dataset of around a million data points representing a firm in a given year, we compare investments of public firms to comparable private firms. This gives credible evidence of the effect of being publicly listed on investment.
The research does not find any strong evidence that publicly listed companies are more short-termist than private companies in terms of their levels of long-term investment. The picture is highly nuanced. On average we show that:
- Publicly listed companies invest up to 1% more of their assets in R&D when compared with similar private companies. Given that R&D is associated with the long-term, this suggests that publicly listed companies are not more short-termist than private companies.
- Publicly listed companies invest up to 1.2% less of their assets in plant and machinery when compared with similar private companies. This finding varies in size and significance depending on the definition of a public company.
- There is limited evidence to suggest that when a company changes status (e.g. from public to private, or vice-versa), investment patterns change significantly. Companies which become publicly listed tend to have higher investment overall compared to when they were private, and vice-versa for when public companies become private.
There are some limitations to the study which means we cannot rule out short-termism completely. In particular, there may be drivers of both listed status and investment which we do not observe and so cannot control for (e.g. risk appetite). It is also very difficult to find credible private comparators for very large listed firms. Nevertheless the findings strongly suggest that blanket assertions of short-termism resulting from public listing lack a strong empirical basis in the UK.
Frontier regularly conducts quantitative analysis of policies relating to productivity, innovation and investment.
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