A Broader Understanding of Investment Horizon and Performance
This paper investigates the performance effects of firm-level investment horizon and describes its central role in firm strategy. While many have argued that firms need to take longer investment horizons to maximize value creation, we identify boundary conditions on this prescription. By integrating research on investment horizon from financial economics with firm-level insights from the strategic management literature, we theorize that the relation between investment horizon and firm performance relationship is quadratic rather than linear. Additionally, we analyse the distribution of firms across the spectrum of investment horizon and test the general intuition that U.S. firms have predominantly short investment horizons. We find support for the hypothesized quadratic relation in a multi-year sample of manufacturing firms and confirm that most firms have shorter horizons than would predict peak performance.