Dynamics of value-based management: does shareholder value cause short-termism?

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. To date, it is not clear if SHV 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 contribution to the debate on short-termism is to better understand the role of SHV and VBM in explaining short-termism, effects of policies to mitigate it, and to direct future empirical research as well as advancing modeling of SHV and VBM. © 2015, Springer-Verlag Berlin Heidelberg.