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On the Social Optimality of the Value Maximization Criterion

Published online by Cambridge University Press:  06 April 2009

Wayne Y. Lee  and
Andrew J. Senchack Jr
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Extract

As an operational objective for firm management, the market value maximization criterion derives its theoretical validity from the Fisherian separation principle which states that production decisions for an economy can be made without regard to consumer-investors' preferences for consumption, given perfectly competitive markets. In other words, if the firm's activities do not affect the prices of consumptive goods, then maximizing the wealth of its shareholders will lead to a maximization of each shareholder's utility. Not only does this optimality criterion avoid the ambiguities and vagaries of constructing an aggregate shareholder preference function, but when implemented as a firm decision rule, should result in the same production plan that each investor would select himself, and thereby should represent a Pareto optimal allocation of resources: (Hirshleifer [5, Chapters 1, 9]; Fama and Miller [3, Chapters 2, 7]; and more recently, Ekern and Wilson [2], Merton-Subrahmanyam [7], LeRoy [6]).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 2 , June 1980 , pp. 379 - 389
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

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