Shareholder-Value Maximization and Product-Market Competition

Julio Rotemberg and David S Scharfstein

The Review of Financial Studies, 1990, vol. 3, issue 3, 367-91

Abstract: We investigate product-market competition when managers maximize shareholders value rather than their expected discounted value of profits. If shareholders are imperfectly informed about future profitability, shareholder-value maximization can lead to either more or less aggressive product-market strategies. Lower rivals' profits lead investors to believe that the firm's costs are low relative to those of its rivals and that the industry's prospects are poor. If the former (latter) inference dominates, each firm tries to lower (raise) its rivals' profits to increase its own stock price. We also consider implications for corporate financial structure. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1990
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