DP12186 Companies Should Maximize Shareholder Welfare Not Market Value

Author(s): Oliver Hart, Luigi Zingales
Publication Date: July 2017
Keyword(s): firm objective, Friedman, prosocial, shareholder value
JEL(s): G30, K22, L21
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12186

What is the appropriate objective function for a firm? We analyze this question for the case where shareholders are prosocial and externalities are not perfectly separable from production decisions. We argue that maximization of shareholder welfare is not the same as maximization of market value. We propose that company and asset managers should pursue policies consistent with the preferences of their investors. Voting by shareholders on corporate policy is one way to achieve this.