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A critique of shareholder value maximization


Magill, Michael; Quinzii, Martine; Rochet, Jean-Charles (2013). A critique of shareholder value maximization. Swiss Finance Institute Research Paper 13-16, University of Zurich.

Abstract

The majority of academic economists share the view that a corporation should serve the exclusive interests of its shareholders (shareholder value maximization). This view is fi rmly grounded on the extension, by Arrow (1953) and Debreu (1959) of the two welfare theorems to production economies with uncertainty and complete markets. This paper considers a variant of the Arrow-Debreu model where uncertainty is endogenous: probabilities of productive outcomes depend on decisions made by fi rms. In that case, a competitive equilibrium with shareholder value maximizing fi rms (capitalist equilibrium) is never Pareto optimal. This is because endogenous uncertainty implies that firms exert externalities on their consumers and their employees. When rms are stakeholder oriented, in that their managers are instructed to maximize a weighted sum of their shareholder value and of their contributions to consumer and employee welfares, the new competitive equilibrium (stakeholder equilibrium) improves upon the capitalist equilibrium.

The majority of academic economists share the view that a corporation should serve the exclusive interests of its shareholders (shareholder value maximization). This view is fi rmly grounded on the extension, by Arrow (1953) and Debreu (1959) of the two welfare theorems to production economies with uncertainty and complete markets. This paper considers a variant of the Arrow-Debreu model where uncertainty is endogenous: probabilities of productive outcomes depend on decisions made by fi rms. In that case, a competitive equilibrium with shareholder value maximizing fi rms (capitalist equilibrium) is never Pareto optimal. This is because endogenous uncertainty implies that firms exert externalities on their consumers and their employees. When rms are stakeholder oriented, in that their managers are instructed to maximize a weighted sum of their shareholder value and of their contributions to consumer and employee welfares, the new competitive equilibrium (stakeholder equilibrium) improves upon the capitalist equilibrium.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
JEL Classification:D50, G39
Language:English
Date:2013
Deposited On:03 Mar 2014 08:25
Last Modified:05 Apr 2016 17:44
Series Name:Swiss Finance Institute Research Paper
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2246797
Other Identification Number:merlin-id:4668
Permanent URL: https://doi.org/10.5167/uzh-93698

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