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The short-termism of corporate managers has been a recurring concern of policymakers for decades due to the close tie with mispricing in capital markets. This column shows that a root cause of mispricing is the tight tracking of asset managers to market cap benchmarks. This seemingly prudent practice is commonly adopted by giant pensions, sovereign-wealth funds and endowment funds. However, it gives rise to momentum trading, excessive focus on short-term price movements, high volatility for overvalued assets, and overvaluation for the aggregate market.
