In its submission to the Financial System Inquiry, the ISA said the average holding period of listed equity in Australia has dropped from "about six years in the 1980s" to "less than one year".
Short-termism is a "well-recognised problem" in the UK, the US and increasingly in Australia, said the submission.
The move away from fixed capital and towards trading is "creating new financial products on old fixed capital, as well as restructuring, re-engineering and mergers and acquisitions", said the ISA.
"Empirical evidence suggests that cash flows are discounted heavily and short-term earnings are favoured over long-term investment projects," said the submission.
The effects of 'short-termist' behaviour are serious at both firm and national levels, said the ISA.
"There is a bias towards action and trading found at almost every point in the chain by which savings is transformed into investment," said the submission.
"An emphasis on developing liquidity in financial instruments has reduced the incentives for some investors to engage with the companies in which they are invested," it said.
In Australia, short-termism is interacting with "hyperactive retailisation" in a "feedback loop", said the ISA.
"The cost can be estimated by comparing the operating costs of public offer super funds against super funds not open to the public: fees for public offer funds have been 50 per cent higher than those for non-public offer funds between 2008 and 2013 ($761 compared to $507 a year)," said the submission.
"The twin goals of capital markets – to operate and sustain high performing companies and to earn good returns for savers without undue risk – are essentially identical propositions," said the ISA.
"In the long run, the profits earned by high-performing companies are the only source of returns for savers who invest in them," said the submission.
