Companies Should Maximize Shareholder Welfare Not Market Value

Companies Should Maximize Shareholder Welfare Not Market Value

Oliver Hart, Luigi Zingales

Series number :

Serial Number: 
521/2017

Date posted :

July 22 2017

Last revised :

August 09 2017
SSRN Share

Keywords

  • Firm objective • 
  • shareholder value • 
  • Prosocial • 
  • Friedman

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.

Authors

Real name: 
Fellow, Research Member
Department of Economics, Harvard University