Rieg, Robert, "Dynamics of value-based management – – does shareholder value cause short-termism?", 2012 July 22-2012 July 26

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Shareholder Value (SHV) and value-based management (VBM) are blamed for causing short-termism of investors and managerial myopia. Empirical evidence states decreased holding periods of stocks by investors, increased discount rates and widespread adoption of earnings management. While this supports the existence of short-termism and myopia, it does not clarify its causes. What is missing is: do shareholder value and value-based management cause short-termism in the behavior of investors and managers? The paper uses System Dynamics to model both concepts and to try to explain short-termism and myopia as endogenous outcome of these concepts. The main result is, that, given uncertainty of outcomes of managerial action managers will have incentives to engage in short-termism. Since SHV raises target hurdles which increases pressure on managers, short-termism is a direct consequence of SHV itself. The contribution to the debate on short-termism is to better understand the role of SHV and VBM in explaining short-termism and to direct future empirical research as well as advancing modeling of SHV and VBM.

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