Question

The role of financial managers is maximizing shareholders’ wealth. In order to achieve this, financial managers would like to increase firm’s stock price. Therefore, the goal of financial managers is to maximize the current share price. If we assume the financial market is efficient, why is the goal of financial manager to maximize firm’s current share price rather than future share price? In other words, are there any differences between the goal of maximizing current share price and the goal of maximizing future stock price? a more scholar answer please

Answer 1

Share price maximization is a modern approach to financial management. Stock price maximization requires that managers take decisions that maximize stockholder wealth, that bondholders be fully protected from expropriation, that markets be efficient and that social costs be negligible.

Maximization of profit used to be the main aim of a business and financial management till the concept of Share price maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders.

The objective of share price maximization is an appropriate and operationally feasible criterion to choose among the alternative monetary actions. It provides an unambiguous measure of what financial management should seek to maximize in making investment and financing decisions on behalf of shareholders. From the shareholders' point of view, the wealth created by a company through its actions is reflected in the market value of the company's shares. Therefore, the wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares. The value of the company's shares is represented by their market price that, in turn, is a reflection of shareholders' perception about the quality of the firm's financial decisions. The market price serves as the firm's performance indicator. That is Wealth maximization means maximizing the net wealth of the company's share holders. Wealth maximization is possible only when the company pursues policies that would increase the market value of shares of the company.