Shareholder Theory - How Opponents and Proponents Both Get it Wrong
10 Pages Posted: 3 Dec 2008
Date Written: November 30, 2008
Shareholder wealth maximization is accepted by most financial economists as the appropriate objective for financial decision-making. Recently, wealth maximization has been criticized by a growing array of opponents for condoning the exploitation of employees, customers, and other stakeholders, and encouraging short-term managerial thinking. Although these critics are misguided, proponents of shareholder theory have helped to create this confusion by exhorting managers to maximize the firm's current stock price. Because a firm's stock price can be manipulated in the short-term, incentives to increase a firm's current stock price can distort operating and investment decisions. When wealth maximization is properly defined as a long-term goal, it is not as narrowly focused as critics believe. The main prescription of shareholder theory-invest in all positive net present value projects-benefits not only shareholders, but also key stakeholders including employees and customers.
Keywords: shareholders, stakeholders, wealth maximization
JEL Classification: G30
Suggested Citation: Suggested Citation