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Value Maximization As An Ex Post Consistent Firm Objective When Markets are Incomplete

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  • Tarun Sabarwal

    (The University of Texas at Austin)

Abstract

In competitive economies with private firm ownership, incomplete markets, and firm shareholders changing over time, several firm objectives have been proposed. Some are useful to understand efficiency of equilibria, and others are explicitly consistent with majority shareholder control or collective choice rules, but it is not always clear if versions of each type are consistent with versions of the other type. This paper shows that ex-post, value maximizing rules, (including those proposed by Dreze(1974), and Grossman and Hart (1979),) are consistent with shareholder preferences in such economies; that is, along the equilibrium path, in every period and state of the world, every coalition of a firm's shareholders in that period and state approves a value maximizing production plan. This result applies to cases when shareholders within a firm and across firms can form coalitions, and when stock trading can be ex-dividend or cum-dividend, and with a combination of both. This result does not resolve the problem of inefficiency of stock market equilibria, or that of ex ante disagreement among shareholders. It can help understand when firm objectives with some desirable properties are consistent with a particular version of shareholder control, and it provides a stability criterion (in terms of robustness to shareholder coalitions) for organizing productive resources in such economies.

Suggested Citation

  • Tarun Sabarwal, 2004. "Value Maximization As An Ex Post Consistent Firm Objective When Markets are Incomplete," GE, Growth, Math methods 0406002, University Library of Munich, Germany, revised 13 May 2005.
  • Handle: RePEc:wpa:wuwpge:0406002
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    References listed on IDEAS

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    1. Momi, Takeshi, 2001. "Non-existence of equilibrium in an incomplete stock market economy," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 41-70, February.
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    Cited by:

    1. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.

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    More about this item

    Keywords

    Incomplete Markets; Firm Objective; Value Maximization; Shareholder Preferences;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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