The Interaction between the Problem of Adverse Selection and Short-termism in the Company

The main goal of the research is the examination the relationship between the problem of adverse selection and short-termism policy. The peculiarity of this work is the study of market signals, which were not considered in the previous empirical literature, and the assessment of their impact on the short-termism manifestation in companies. Noteworthy, that the panel data are used in the work not only to assess the time effects, but also to separate short-term and long-term periods in the econometric model. In addition, the effects of short-termism are considered for heavy industry companies, namely the metallurgical industry, when most of the research was conducted on the data of the financial sector. Thus, the aim of the work is to study the effect of short-termism signals on the ROE of companies and to identify the effect of adverse selection, provided by these signals. The main assumptions of the study are: (1) by paying dividends companies give investors a signal of their high quality, and the desire of shareholders to receive large and frequent payments incline managers to reduce long-term investments. In other words, the policy of such companies becomes short-termism directed. However, if the company refuses to pay dividends in order to develop the company and increase its value in the long term, investors interpret this as a negative signal and refuse to invest in these enterprises. This leads to unfavorable selection in the market. (2) it is Also assumed that if the signal is corporate risk management (ERM), it will avoid the problem of short-termism, or at least reduce its severity. By building an econometric model it was found a significant negative effect of dividend payments under the conditions of low investment activity and the absence of a system of corporate risk management. However, the ERM factor turned out to be insignificant, so the effect could not be identified.