Companies Should Maximize Shareholder Welfare Not Market Value

39 Pages Posted: 22 Jul 2017 Last revised: 9 Aug 2017

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2017

Abstract

What is the appropriate objective function for a firm? We analyze this question for the case where shareholders are prosocial and externalities are not perfectly separable from production decisions. We argue that maximization of shareholder welfare is not the same as maximization of market value. We propose that company and asset managers should pursue policies consistent with the preferences of their investors. Voting by shareholders on corporate policy is one way to achieve this.

Keywords: Firm Objective, Shareholder Value, Prosocial, Friedman

JEL Classification: L21, G30, K22

Suggested Citation

Hart , Oliver and Zingales, Luigi, Companies Should Maximize Shareholder Welfare Not Market Value (July 1, 2017). ECGI - Finance Working Paper No. 521/2017. Available at SSRN: https://ssrn.com/abstract=3004794

Oliver D. Hart

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-3196 (Phone)
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

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