Maximisation of Shareholder's Wealth
As a financial student who will work in a financial company in the future, there is a question worth thinking about. What is the main financial goal of the company's finance? For this problem, people will have different opinions for different types of companies at different stages in different situations, for example, for companies eager to occupy market share, maximizing sales is their goal; for companies seeking short-term benefits, maximizing profits is their goal; for emerging companies, survival is their company's goal The biggest goal and so on. But among so many goals, the most debated one is which is the main goal of the company's finance between maximisation of shareholder's wealth and maximisation of profits.
Theory and evidences
In theory, except the Shareholder Primacy Norm (SPN) in which “….managers and company directors have the fiduciary obligation to hold the interests of shareholders first and foremost in their decision-making on behalf of the corporation.” (Bento et al., 2017), the final aim of corporate finance is to make investment and financing decisions that maximise the value of the publicly-listed company for its owners, therefore shareholder wealth is seen as a better tool for decision makers than for profits. Profit maximization can be controlled by short-term price manipulation in many cases, but it may lose a lot of other things, such as the company's sales in the future. However, the stock market generally evaluates a company from the perspective of its future growth potential, which leads to a high risk of profit maximization. But from the perspective of maximizing shareholders' interests, although the total profits are equal, the income of maximizing shareholders' wealth is relatively stable, the volatility is low, and the risk is small, which also causes the stock market to value it higher, which may lead to the rise of the overall stock price. Therefore, maximizing shareholder's profit is fully in line with the company's financial.
My opinion and comment
For my personal opinion, as the owner of the company, the shareholders of the company should take the maximization of the shareholders' interests as the main goal of the company's finance. However, according to the case of collection in class, in the actual operation process, the interests of shareholders and the interests of managers often conflict, which often leads to some problems in the operation of the company. This is what we need to go to pay attention.
The author explains the meaning of the maximisation of shareholder's wealth, he gives an example to explain the importance of shareholder's wealth, and he puts his own opinion in the end , which is critical.
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ReplyDeleteMaybe some cases can be appropriately added to have a deeper experience
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