Why is there so little academic research on long termism in financial markets?
Andreas G. F. Hoepner, Senior Academic Fellow, PRI
From a sustainability angle, this question is crucial. Particularly since creating a sustainable global financial system, which is the PRI’s mission, depends on long term thinking and decision making. In other words, if the majority of market participants base their decisions predominantly on short periods in the near future, then too many market participants ignore the potentially large risks waiting after these short periods. An indication of how catastrophic these risks can be is illustrated by the recent global financial crisis. Hence, without a fundamental understanding backed by research on which factors motivate investment decision makers to focus on the long instead of the short term, creating a sustainable global financial system appears very challenging if not impossible.
However, policy makers have a substantial and increasing interest in long termism in financial markets – and, along with institutional investors such as CPPIB’s Mark Wiseman – are setting the scene in “long term capitalism” through work such as the UK’s Kay Review, European Commission’s work on long term financing, and the DEFRA risk assessment (illustrated here in “Climate Change Risk Assessment for the Biodiversity and Ecosystem Services Sector (2012)”, paper 4). So given that Finance academics teach thousands of students whose job it will be to serve institutional investors, sometimes as a future CIO, and given that academia is substantially funded by the tax payer, why have Finance academics been so sparsely interested in researching long termism in financial markets? Why does it take until 2012 for clever academics (i.e. Cremers and Pareek) to develop a recognised measure of the “length of time that institutional investors have held a stock in their portfolios” (Cremers, Pareek & Sautner, 2013: 3). Why have so few academics studied the valuation effects of legislation supporting long term sustainable financial markets (as Zeume does for the UK Bribery Act 2010 in ”Bribes and firm value”, paper 3)?
The pessimist in me fears that many finance academics do not recognise much responsibility deriving from their public funding and instead see their “market” as an oligopsony with a few editors of so called elite journals being their only relevant clients. The realist in me observes that most finance professors do not have a Bloomberg login and depend on an academic Chicago dataset (i.e. CRSP) for their asset pricing research that is only sufficient for US stocks, is inconsiderate of an investable equity index universes and barely known by any institutional investor. However, the optimistic in me sees small signs of change and believes that collaboratively, institutional investors can have a material impact on driving academic research on long termism. They might even be able to nudge academics to teach long termism to their students. Why am I optimistic? Institutional investors and their service providers who are PRI signatories are the clients of thousands of Finance graduates, who they hire every year and on whose tuition fees fund many Finance academics. Hence, if institutional investors were to collaboratively and consistently engage with Finance academics to focus more on the subject of long termism in specific and research relevant to the real world in general, these investor voices would be heard and acted on. A challenge to all our readers.
RI Quarterly Vol. 3: Long-termism in financial markets
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