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A Critique of Shareholder Value Maximization

Author

Listed:
  • Michael J. P. Magill

    (University of Southern California - Department of Economics)

  • Martine Quinzii

    (University of California, Davis - Department of Economics)

  • Jean-Charles Rochet

    (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB))

Abstract

The majority of academic economists share the view that a corporation should serve the exclusive interests of its shareholders (shareholder value maximization). This view is fi rmly grounded on the extension, by Arrow (1953) and Debreu (1959) of the two welfare theorems to production economies with uncertainty and complete markets. This paper considers a variant of the Arrow-Debreu model where uncertainty is endogenous: probabilities of productive outcomes depend on decisions made by fi rms. In that case, a competitive equilibrium with shareholder value maximizing fi rms (capitalist equilibrium) is never Pareto optimal. This is because endogenous uncertainty implies that firms exert externalities on their consumers and their employees. When rms are stakeholder oriented, in that their managers are instructed to maximize a weighted sum of their shareholder value and of their contributions to consumer and employee welfares, the new competitive equilibrium (stakeholder equilibrium) improves upon the capitalist equilibrium.

Suggested Citation

  • Michael J. P. Magill & Martine Quinzii & Jean-Charles Rochet, 2013. "A Critique of Shareholder Value Maximization," Swiss Finance Institute Research Paper Series 13-16, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1316
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    Citations

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    Cited by:

    1. Azar, José, 2017. "Portfolio Diversification, Market Power, and the Theory of the Firm," IESE Research Papers D/1170, IESE Business School.
    2. De Donder Philippe & Roemer John E., 2016. "An allegory of the political influence of the top 1%," Business and Politics, De Gruyter, vol. 18(1), pages 85-96, April.
    3. Elena L. Mercato & Vincenzo Platino, 2017. "On the regularity of smooth production economies with externalities: competitive equilibrium à la Nash," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(1), pages 287-307, January.
    4. Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.
    5. Jean-Marc Robin & Stéphane Bonhomme & Koen Jochmans, 2014. "Estimating Multivariate Latent-Structure Models," Sciences Po publications 2014-18, Sciences Po.
    6. Justin Leroux, 2015. "Track-and-Trade: A liability approach to climate policy," CIRANO Working Papers 2015s-18, CIRANO.
    7. Maria Cristina Zaccone & Cristina Santhià & Martina Bosone, 2022. "How Hybrid Organizations Adopt Circular Economy Models to Foster Sustainable Development," Sustainability, MDPI, vol. 14(5), pages 1-20, February.

    More about this item

    Keywords

    Shareholder Value Maximization; Stakeholder Model; Endogenous Uncertainty;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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