Evidence on companies’ investment behaviour supports that conclusion – for example, by looking at the investment choices of two otherwise-identical firms, one of which is publically listed, the other private-owned. Studies in the US have found evidence otherwise-identical private companies consistently invest considerably more, for given profits, than public companies (Asker et al (2014)). Chart 6 shows some diagnostics for a matched sample of public and private UK companies (Davies et al (2014)). In line with US evidence, it suggests that investment is consistently and significantly higher among private than public companies with otherwise identical characteristics, relative to profits or turnover. In other words, shareholder short-termism may have had material costs for the economy, as well as for individual companies, by constraining investment. Shareholders/managers and other stakeholders (a)  Risk-shifting  A fourth incentive friction arises in the relationship between shareholders and creditors in a company. From the work of Robert Merton, under limited liability the equity of a company can be valued as a call option on its assets, with a strike price equal to the value of its liabilities (Merton (1974)). The value of this option is enhanced by increases in the volatility of asset returns. Why? Because, under limited liability, this increases the upside return to shareholders, without affecting their downside risk. So for a firm seeking to maximise shareholder value, an expedient way of doing so is simply to increase the volatility of company profits. BIS central bankers’ speeches  9  This risk does not, however, disappear into the ether.

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