Andrew Haldane at the Bank of England said the City's short-term bias held back important investment – and could be getting worse
A senior Bank of England official today called for government action to stem the rise of short-termist investment decisions taken in the City.
Warning that the financial sector's "myopic" approach could be having a damaging effect on infrastructure and high-tech capital projects, Andrew Haldane said it was time for policy measures to tackle the "market failure".
Haldane, the Bank's executive director for financial stability, said in a speech in Brussels that remedies for short-termism had been suggested, including greater transparency, changing the behaviour of shareholders, making new employment contracts more sensitive to long-term performance, and using taxes and subsidies to penalise the short-term holding of securities.
"Some of these initiatives have been tried and tested to differing degrees, at different times and in different countries. They have not obviously arrested the short-termism trend," Haldane said. "It might be time to increase the level of policy ambition. Without intervention, the long could become shorter still."
In a paper written with Richard Davies, an economist at the Bank, Haldane said the historical and empirical evidence since the 19th century had been consistent with short-termism.
"This evidence – anecdotal, survey, quantitative – is broadly consistent with popular perceptions. Capital market myopia is real. It may be rising. For at least some of the jury, however, it remains inconclusive."
Haldane said he and Davies had tried to measure the period over which potential investors expected a project to generate returns. They looked at data from a sample of more than 600 firms between 1980 and 2009 and tested whether expected future cashflows paid by a company were discounted "excessively" in the determination of the share price today. They found there was significant evidence among UK and US companies over the past few decades of investors putting too high a value on short-term returns as opposed to investing for the long term, with the effects more marked in the latter part of the sample.
"This is a market failure. It would tend to result in investment being too low and in long-duration projects suffering disproportionately. This might include projects with high build or sunk costs, including infrastructure and high-tech investments.
"These projects are often felt to yield the highest long-term (private and social) returns and hence offer the biggest boost to future growth. That makes short-termism a public policy issue."
Source: www.guardian.co.uk
A senior Bank of England official today called for government action to stem the rise of short-termist investment decisions taken in the City.
Warning that the financial sector's "myopic" approach could be having a damaging effect on infrastructure and high-tech capital projects, Andrew Haldane said it was time for policy measures to tackle the "market failure".
Haldane, the Bank's executive director for financial stability, said in a speech in Brussels that remedies for short-termism had been suggested, including greater transparency, changing the behaviour of shareholders, making new employment contracts more sensitive to long-term performance, and using taxes and subsidies to penalise the short-term holding of securities.
"Some of these initiatives have been tried and tested to differing degrees, at different times and in different countries. They have not obviously arrested the short-termism trend," Haldane said. "It might be time to increase the level of policy ambition. Without intervention, the long could become shorter still."
In a paper written with Richard Davies, an economist at the Bank, Haldane said the historical and empirical evidence since the 19th century had been consistent with short-termism.
"This evidence – anecdotal, survey, quantitative – is broadly consistent with popular perceptions. Capital market myopia is real. It may be rising. For at least some of the jury, however, it remains inconclusive."
Haldane said he and Davies had tried to measure the period over which potential investors expected a project to generate returns. They looked at data from a sample of more than 600 firms between 1980 and 2009 and tested whether expected future cashflows paid by a company were discounted "excessively" in the determination of the share price today. They found there was significant evidence among UK and US companies over the past few decades of investors putting too high a value on short-term returns as opposed to investing for the long term, with the effects more marked in the latter part of the sample.
"This is a market failure. It would tend to result in investment being too low and in long-duration projects suffering disproportionately. This might include projects with high build or sunk costs, including infrastructure and high-tech investments.
"These projects are often felt to yield the highest long-term (private and social) returns and hence offer the biggest boost to future growth. That makes short-termism a public policy issue."
Source: www.guardian.co.uk
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