Question

In class, we address the importance of maximizing shareholders’ wealth. However, it seems like maximizing stock prices does not make sense, because investors focus on short-term results and don’t care about long-term consequences. What do you think? Please discuss.

Answer 1

The statement "importance of maximizing shareholders' wealth is absolutely correct and it is the management's responsibility to put all the efforts to give shareholders their best return in the long run. Now there can be 2 types of shareholders. One which are focused on short run and one which are focus on long run. But instead of variety of shareholders, market always takes in the view of long term vision. Stock market take into consideration the long term view and positevely react to the news and announcements which will have positive long term benefits despite having short term negetive impact.

For example: If a company is considering investing huge money in setting up a plant which require huge investment and it will only start bearing the fruit after 5 years. This is plan is in line with company's long term vision. So market will reach positevely although company might not earn any thing for 5 years.

So in short, although investors will have different time horizons, market will take into consideration the long term and strategic view.