More formally, the expected return can be written as the sum of the risk free rate and a companyspecific risk premium for company j:18 (3)  The actual return on an investment is the sum of the capital gain and the dividend yield: (4)  Assuming an efficient market, actual returns differ only from expected returns due to a forecast error which is uncorrelated with expected returns.19 Using this assumption, we can substitute (4) into (3) to give an equation for the equity price. 17  The return is $ – $ = $ divided by the cost of investment. 18  This is the case with the capital asset pricing model (CAPM) (Lintner (1965), Sharpe (1964)) and arbitrage pricing theory (Ross (1976)). Under the CAPM, for example, the company specific risk premium is equal to the company specific beta multiplied by the market risk premium  . This means  . 19  That is, we assume that  BIS central bankers’ speeches  . 5  (5)  So the price of the security is simply the expected price and dividend in the next period, discounted by the sum of the risk-free rate and the company-specific risk premium.
These projects are often felt to yield the highest long-term (private and social) returns and hence offer the biggest boost to future growth. That makes short-termism a public policy issue. But what would be an appropriate public policy response to this capital market failure? A number of proposals have been suggested by various authors. These include: (a)  Transparency: The lightest touch approach would be to require greater disclosures by financial and non-financial firms of their long-term intentions – for example, their long-term performance, strategy and compensation practices.26 For financial firms, this might include metrics of portfolio churn. This could be accompanied by a programme of educating managers, investors and advisors of their fiduciary responsibilities. (b)  Governance: A more intensive approach would involve acting directly on shareholder incentives through their voting rights. For example, fiduciary duties could be expanded to recognise explicitly long-term objectives.27 More concretely, shareholder rights could be enhanced for long-term investors, perhaps with a duration-dependent sliding scale of voting rights.28  (c)  Contract Design: There have been various attempts over the past few years to make compensation contracts more sensitive to long-term performance and risk. This includes employment contracts conditioned on long-term performance, or with deferral or clawback.