Shareholder Theory – How Opponents and Proponents Both Get it Wrong
5 Pages Posted: 9 Dec 2015
Date Written: December 3, 2015
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.
Suggested Citation: Suggested Citation