Problems with maximizing shareholder wealth

The second is the difficulties to define a measure of firm performance connected to stock price.ДЇavorable reputation for producing quality products or services may enable firms to charge premium prices, attract better employee applicants and improve access to financial markets. The first relates to knowing if the stock prices are a good indicator of the true value of the firmвЂ™s common stock based on forward-looking performance.

Two problems arise when attempting to implement the goal of maximizing shareholder value. Secondly, maximizing the wealth created by the firm must be equivalent to maximizing social welfare. It must first be equivalent to maximizing the overall wealth being created by the corporation. Shareholder value does not always result in the maximization of social welfare. What is wrong with maximizing shareholders value Secondly, primacy of shareholder interest is established in case law вЂњthe business corporation is organized and carried on primarily for the profit of stockholdersвЂќ.

This idea is linked to Adam SmithвЂ™s view on the invisible hand, when individuals pursue their own interest they promote that of society. When shareholder interest is maximized the interest of society are optimized. What is right about maximizing shareholder valueДЇirstly, when shareholder value is maximized, social welfare is maximized. Maximizing shareholder value is generally perceived as being the goal of any company and the managers that are employees of the firm act as agents for the firmвЂ™s shareholders.

Problems with maximizing shareholder wealth