Question

In finance we often assume that the objective of the firm is to maximise the value of the firm. Why might this be a desirable objective? Why might managers not pursue such an objective?

Answer 1

In finance it is often assumed that the main and primary objective of a financial firm is to maximise and magnify it's overall profit because it is what drives the firm in the long run as it is the key to growth and success.

the advocators of profit maximization often believes that the profit and financial success of company is most desired by any of the shareholders and other stakeholders in the company because that give them a sense of satisfaction and a sense of security because their overall profit is maximized and they also gain through expansion of the company in monetary terms. Advocators of this theory focuses that the end result of any activity in the form must be profit making and if it is not leading to profits, it should not be undertaken by the company.

managers might not pursue such objectives because they believe that in the long run, profits are not every thing there is a wider term associated then profit maximization and that is called wealth maximization. Wealth maximization is the theory that focuses on to overall maximization of shareholders wealth by taking steps which would not be yielding benefits in the short run but which will definitely the benefits in the long run of the company and such decisions must be emphasized and taken in order to gain a fair amount of market share in the long run and maintaining a good reputation of the company throughout the society as well as throughout the business community