Shareholder Value

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The purpose of the corporation:
Shareholder-value maximization?
Finance Working Paper N°. 95/2005
Revised version: February 2006

Petra Joerg
Institut für Finanzmanagement, Universität Bern

Claudio Loderer
Institut für Finanzmanagement, Universität Bern

Lukas Roth
The Pennsylvania State University

Urs Waelchli
Institut für Finanzmanagement, Universität Bern

© Petra Joerg, Claudio Loderer, Lukas Roth and Urs
Waelchli 2006. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
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It can also be interpreted, however, as a debate about the purpose of the corporation—or about whose interests the corporation should ultimately serve.
Various academics have joined the debate, arguing that there is an increasing consensus that managers should strive to maximize shareholder value, and that doing so maximizes social welfare. There is also a claim that managers are increasingly setting shareholder-value maximization as their main corporate target. This paper questions the existence of a widespread consensus that companies maximize shareholder value or should do so.
Theoretical reasons to doubt the existence of a strong consensus are often related to the externalities that a focus on shareholder-value maximization would create.
How corporations are run can affect, for example, the welfare of entire regions.
Tirole (2001, p. 3) summarizes this line of reasoning by writing, “There is no denying that such externalities may be substantial […]. Why should institution design ignore the natural stakeholders, and favor the investors, who are ‘stakeholders by design,’ by giving them full control rights and by aligning managerial compensation with their interests?” The doubts about the consensus on shareholder-value maximization, however, transcend financial externalities. Take the case of managerial compensation. Critics throughout the Western world have called for legal
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