A goal of financial management can be to maximize shareholder
wealth by paying dividends and/or causing the market value to
increase.
LEARNING OBJECTIVE [ edit ]
Describe the relationship between shareholder value and market value
KEY POINTS [ edit ]
One interpretation of proper financial management is that the agents are oriented toward the
benefit of the principals, shareholders, and in increasing their wealth by paying dividends and/or
causing the stock price or market value to increase.
The idea of maximizing market value is related to the idea of maximizing shareholder value, as
market value is the price at which an asset would trade in a competitive auction setting; for
example, returning value to the shareholders if they decide to sell shares or if the firm decides to
sell.
There are many different models of corporate governance around the world. These differ
according to the variety of capitalism in which they are embedded. The Anglo-American (US and
UK) "model" tends to emphasize the interests of shareholders.
The sole concentration on shareholder value has been criticized, for concern that a management
decision can maximize shareholder value while lowering the welfare of other stakeholders.
Additionally, short-term focus on shareholder value can be detrimental to long-term shareholder
value.
TERMS [ edit ]
market value
The total value of the company as traded in the market. Calculated by multiplying the number of
shares outstanding by the price per share.
shareholder
One who owns shares of stock.
principal
One who directs another (the agent) to act on one′s behalf.
Give us feedback on this content: FULL TEXT [edit ]
Introduction
Financial management is concerned with
financial matters for the practical
significance of the numbers, asking: what
do the figures mean? There are several
goals of financial management, one of
which is
maximizing shareholder and market
value .
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Money to Shareholders
Maximizing shareholder and market value is, for some, one of the goals of financial management.
Maximizing Shareholder Value
The idea of maximizing shareholder value comes from interpretations of the role of corporate
governance. Corporate governance involves regulatory and market mechanisms and the roles
and relationships between a company's management, its board, its shareholders,
other stakeholders, and the goals by which the corporation is governed.
In large firms where there is a separation of ownership and management and no controlling
shareholder, theprincipal–agent issue arises between upper-management (the "agent") and
shareholders (the "principals"). The danger arises that, rather than overseeing management
on behalf of shareholders, the board of directors may become insulated from shareholders
and beholden to management.
Thus, one interpretation of proper financial management is that the agents are oriented
toward the benefit of the principals - shareholders - in increasing their wealth by
paying dividendsand/or causing the stock price or market value to increase.
Maximizing Market Value
The idea of maximizing market value is related to the idea of maximizing shareholder value,
as market value is the price at which an asset would trade in a competitive auction setting; for
example, returning value to the shareholders if they decide to sell shares or if the firm decides
to sell.
There are many different models of corporate governance around the world. These differ
according to the variety ofcapitalism in which they are embedded. The Anglo-American (US
and UK) "model" tends to emphasize the interests of shareholders.
The sole concentration on shareholder value has been widely criticized, particularly after the
late-2000s financial crisis, where attention has risen to the concern that a management
decision can maximize shareholder value while lowering the welfare of other stakeholders.
Additionally, short-term focus on shareholder value can be detrimental to long-term
shareholder value.