liquidity and short term thinking

Interesting post over at naked capitalism arguing that although most people seem to think more liquidity is good for the financial system, maybe it’s actually the culprit behind problems like overly short-term thinking by public company CEOs:

But in the equity markets, it may be easier to make a case for the hidden costs of perhaps too much ease of trading. The usual scapegoat for Corporate America’s short-termism is options-based executive pay. But another culprit is the lack of long-term shareholders. I should verify this independently, but a McKinsey director told me not long ago that the average NYSE stock is held seven months, down from eleven months around 2000. No wonder CEOs feel they can pay themselves whatever they want to. They truly aren’t beholden to anyone. Transient stockholders deserve no loyalty, but the loyal owners wind up being comparatively few in number (I’d love to see a chart showing the full distribution).

Because public shareholders can sell their shares at anytime, many of those shareholders only care about the short-term price of the stock. Contrast this to private companies such as VC-backed startups where it is standard for all shareholders to have non-transferable, illiquid stock and are therefore in it for the long haul.

Maybe public companies that want long term shareholders should issue shares that have restrictions on selling before a certain time (e.g. 1 year)?

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