How Long is a Long-Term Firm Investment in the Presence of Governance Mechanisms?

We examine the relationship between managerial myopia and three governance mechanisms: ownership concentration, short-term incentive plans and the market for corporate control. We first examine a number of measures for long-term investments in physical assets and show that the net depreciation rate of property, plant and equipment is a better predictor of a firm's long-term investment horizon than alternative measures. We calculate ownership concentration using the Gini coefficient that measures the inequality in the distribution of a firm's ownership. We also examine numerous measures to proxy for short-term incentive plans and the market for corporate control. Using detailed data on ownership and incentive plans, we then relate these governance variables to managerial myopia and show that concentrated ownership and the market for corporate control reduce managerial myopia whereas short-term incentive plans do not have a significant effect on managerial myopia. We also show that the market for corporate control is a more efficient governance mechanism than concentrated ownership. This implies that external governance mechanisms, such as takeover threats, successfully influence managers facing reputational concerns, which may have a substantial impact on firm value. In our robustness analyses, we apply a variety of techniques to control for omitted variable bias, measurement error and other sources of endogeneity that plague empirical studies on managerial myopia