The Corporate Finance Benefits of Short-horizon Investors

We show that firms with more short-term institutional investors have better long-term performance in dynamic economic environments. Following exogenous increases in competitive pressure due to large cuts of import tariff rates, firms with more shortterm investors achieve higher growth rates of sales and employees in comparison to other firms in the industries affected by the tariff cuts. To do so, these firms invest more in fixed assets, R&D, and advertising, and differentiate their products from those of the competitors. Firms with more short-term investors also conduct more diversifying acquisitions and have higher executive turnover in the aftermath of large tariff cuts, suggesting that they put stronger effort in adapting their business to the new competitive environment. These results are not specific to tariff cuts but also robust to increases in competitive pressure due to deregulation shocks. Our findings suggest that firms with more short-horizon investors adapt more promptly to changing economic environments and highlight a potential benefit of short-horizon investors.