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Should company managers focus on "shareholder value maximization" as the primary goal of a firm? What...

Should company managers focus on "shareholder value maximization" as the primary goal of a firm? What are the pros and cons of shareholder value maximum as the objective function of the firm? What kinds of conflicts can arise because of this goal? Please explain.

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Expert Solution

Managers are agents of the shareholders because shareholders are the principles and managers should be working for protection of the interest of the shareholders and they are trying to focus on maximizing the value of the company because when they will be maximizing the value of the company there will be an increase of the share price which will be maximizing the interest of the shareholders.

Advantages related to maximization of interest of shareholder will be-

A. It will be leading to higher shareholders satisfaction and increase in their overall capital.

B. It will also lead to maximization of the market capitalisation of the company.

C. it will lead to lower conflict of interest between managers and shareholders.

there are also disadvantages related to primary goal being maximization of shareholders value because when they will be completely focusing on maximization of the shareholders value then they will not be caring for long term benefits and they will not be trying to care for other stakeholder benefit so they will be highly concentrating on the maximization of the shareholder benefits and ignoring the benefits of other parties.

There can be conflicts related to shareholders and the debt holders because debt holders will be accusing the management of taking higher risk and trying to be profit centred and they will be ignoring the corporate governance issue and they will not be also following up with the ethical norms for long term value maximization so there will be a lot of conflict of interest with society as well

jeff jeffy answered 1 year ago
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