A Critique of Shareholder Value Maximization

Michael J. P. Magill, Martine Quinzii and Jean Rochet
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Michael J. P. Magill: University of Southern California - Department of Economics

No 13-16, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Shareholder Value Maximization; Stakeholder Model; Endogenous Uncertainty (search for similar items in EconPapers)
JEL-codes: D50 G39 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2013-04
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1316

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