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Is there a difference between corporate profit maximization and maximization of shareholder wealth?


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2009-05-17 19:13:52
2009-05-17 19:13:52

Sure, profit maximization relates to profits *only* while shareholder wealth also involves total company equity, debt ratios and any of 15 other financial performance measure ratios. Management could focus on profit maximization over a longer period of time, say, 40 years (Toyota), while the shareholder would rather see stock values and corporate total value increase immediately (get in and get out) (90% of American manufacturers). If management focused on short-term profit maximization, say at the expense of long term sales revenues, then shareholder wealth (stock price) could actually decrease as a result of the loss of market share. The conflict of interests between shareholders and executives is an example of the "principle-agent problem."


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