Adapting to Radical Change: The Benefits of Short-Horizon Investors

We show that following shocks that change an industry’s competitive environment, firms with more shortterm institutional investors experience smaller drops in sales and investment and have better long-term performance than similar firms affected by the shocks. To do so, these firms introduce new products, file trademarks, intensify their innovation efforts, conduct more diversifying acquisitions, and have higher executive turnover in the aftermath of the shocks. Our findings suggest that firms with more short-term investors adapt better to the new competitive environment. Endogeneity of institutional ownership and other selection problems do not appear to drive our findings.