Question

Should stockholder wealth maximization be thought of a long-term or a short-term goal? Which
approach is better? Explain and think of some specific corporate actions that have these
tendencies

Answer 1

Stockholders Wealth Maximization-

Stockholders' play a vital role in an organisation. This is because they risk their capital by investing in the organisation. Thus, maximizing the wealth of these holders is important for the company. For this, the managers must maximize the wealth of the firm. If the wealth of the firm increases the stock price increases. If stock price increases, stockholders wealth increases.

Long-term or Short-term goal-

Stockholders wealth maximization is a long-term goal. This is because, it is a function of future returns that are available to the stockholders. Thus, while taking decisions, the management of a firm must consider Stockholders wealth maximization as a long-term goal rather than short-term. Also, the impacts on the company is positive in the long-term.

Corporate Actions

If a company decides to increase short-term dividends and earnings by elimination research and development expenditures, it will increase stockholders' wealth for short run. But in the long run it is not profitable as the company will not be able to launch new products or services that will lead to larger profits.