Why do we focus on maximize the shareholder wealth rather than short- term profit maximization? What...

Why do we focus on maximize the shareholder wealth rather than short- term profit maximization? What is the difference between maximize the EPS (earnings per share) and maximize stock price? Also we can discuss about the agency conflict between manager and shareholder and how to reduce this agency conflict.

Expert Solution

we will focus on maximizing the shareholders wealth rather than short term profit maximization because shareholders wealth maximization is long-term maximization of wealth and it is sustainable in nature and it is focusing upon taking such measures which will be helping in achievement of long-term vision and mission of the company and keeping the shareholders in the priority through ethical measures.

difference between maximization of the Earning per share and maximization of stock prices that maximization of Earning per share will be taking all such measures in order to increase the net profits of the company which will be belonging to the shareholders of the company and maximization of the Earning per share will be resulting by better management of the resources and cost cutting in the long run maximization of the stock price is taking such measures which will be helpful in increasing the share price of the company by increasing the market capitalisation through improvement of the sentiments of the investor which will take the share price higher like distribution of dividend.

Agency conflict between manager and shareholder is that managers are always acting as an agent for the share holders and when they managers are acting on their own interest rather than acting in the interest of shareholders then there will be arising a conflict between them.

Agency conflict can be neutralized by better management of communication and performance based incentives as well as stock incentive to the managers.

jeff jeffy answered 2 years ago

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