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Companies Should Maximize Shareholder Welfare Not Market Value

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  • Hart, Oliver
  • Zingales, Luigi

Abstract

What is the appropriate objective function for a firm? We analyze this question for the case where shareholders are prosocial and externalities are not perfectly separable from production decisions. We argue that maximization of shareholder welfare is not the same as maximization of market value. We propose that company and asset managers should pursue policies consistent with the preferences of their investors. Voting by shareholders on corporate policy is one way to achieve this.

Suggested Citation

  • Hart, Oliver & Zingales, Luigi, 2017. "Companies Should Maximize Shareholder Welfare Not Market Value," CEPR Discussion Papers 12186, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12186
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    Keywords

    firm objective; Friedman; prosocial; shareholder value;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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