Shareholder Theory – How Opponents and Proponents Both Get it Wrong

5 Pages Posted: 9 Dec 2015

See all articles by Morris G. Danielson

Morris G. Danielson

Saint Joseph's University - Department of Finance

Jean L. Heck

St. Joseph's University - Haub School of Business

David Shaffer

Villanova University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2015

Abstract

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

Danielson, Morris G. and Heck, Jean L. and Shaffer, David R., Shareholder Theory – How Opponents and Proponents Both Get it Wrong (December 3, 2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 18, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=2698627

Morris G. Danielson (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

Jean L. Heck

St. Joseph's University - Haub School of Business ( email )

Philadelphia, PA 19131
United States

David R. Shaffer

Villanova University - Department of Finance ( email )

United States

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