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A Critique of Shareholder Value Maximization

49 Pages Posted: 8 Apr 2013  

Michael J. P. Magill

University of Southern California - Department of Economics

Martine Quinzii

University of California, Davis - Department of Economics

Jean-Charles Rochet

University of Zurich - Swiss Banking Institute (ISB); University of Toulouse I - Institut d'Economie Industrielle (IDEI); Swiss Finance Institute

Date Written: March 26, 2013

Abstract

The majority of academic economists share the view that a corporation should serve the exclusive interests of its shareholders (shareholder value maximization). This view is fi…rmly grounded on the extension, by Arrow (1953) and Debreu (1959) of the two welfare theorems to production economies with uncertainty and complete markets. This paper considers a variant of the Arrow-Debreu model where uncertainty is endogenous: probabilities of productive outcomes depend on decisions made by fi…rms. In that case, a competitive equilibrium with shareholder value maximizing fi…rms (capitalist equilibrium) is never Pareto optimal. This is because endogenous uncertainty implies that …firms exert externalities on their consumers and their employees. When …rms are stakeholder oriented, in that their managers are instructed to maximize a weighted sum of their shareholder value and of their contributions to consumer and employee welfares, the new competitive equilibrium (stakeholder equilibrium) improves upon the capitalist equilibrium.

Keywords: Shareholder Value Maximization, Stakeholder Model, Endogenous Uncertainty

JEL Classification: D50, G39

Suggested Citation

Magill, Michael J. P. and Quinzii, Martine and Rochet, Jean-Charles, A Critique of Shareholder Value Maximization (March 26, 2013). Swiss Finance Institute Research Paper No. 13-16. Available at SSRN: https://ssrn.com/abstract=2246797 or http://dx.doi.org/10.2139/ssrn.2246797

Michael J. P. Magill

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-2104 (Phone)
213-740-8543 (Fax)

Martine Quinzii

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1567 (Phone)
530-752-9382 (Fax)

Jean-Charles Rochet (Contact Author)

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

University of Toulouse I - Institut d'Economie Industrielle (IDEI) ( email )

Manufacture des Tabacs
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Toulouse Cedex, F-31000
France
+33 5 6112 8641 (Phone)
+33 5 6112 8637 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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