Companies Should Maximize Shareholder Welfare Not Market Value

Oliver Hart · Luigi Zingales

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Corporate Finance and Governance Corporate Social Responsibility Reporting Financial Reporting and Valuation Research

Abstract

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.

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