Rethinking Short-Termism: When shareholder impatience reduces short-termism

• We extend Narayanan’s (1985) model by incorporating actors’ time preferences. • Short-term oriented shareholders can reduce rather than increase short-termism. • Such shareholders may not regard short-term investments as short-termist. • Shorter investment horizons can reflect preference alignment, not opportunism. We challenge the common view that short-term oriented shareholders necessarily induce managerial short-termism. Empirical work often treats declines in long-term investment as evidence of value-destroying behavior, but we distinguish efficient short-term investment from genuinely short-termist, value-reducing decisions. Extending Narayanan’s (1985) model to incorporate both managerial and shareholder time preferences, we show that impatient investors interpret fewer actions as short-termist, thereby reducing short-termism for a given investment horizon. Consequently, shorter shareholder investment horizons can mitigate rather than intensify short-termism. This clarification suggests that observed investment patterns may reflect optimal preference alignment rather than managerial opportunism, raising important cautions for regulatory proposals targeting short-term investors.