Companies Should Maximize Shareholder Welfare Not Market Value

36 Pages Posted: 4 Aug 2017

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Luigi Zingales

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

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Date Written: July 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, Friedman, prosocial, shareholder value

JEL Classification: G30, K22, L21

Suggested Citation

Hart, Oliver D. and Zingales, Luigi, Companies Should Maximize Shareholder Welfare Not Market Value (July 2017). CEPR Discussion Paper No. DP12186, Available at SSRN: https://ssrn.com/abstract=3011424

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Luigi Zingales

University of Chicago - Booth School of Business ( email )

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773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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