Shareholder Value

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The purpose of the corporation:
Shareholder-value maximization?
Finance Working Paper N°. 95/2005
Revised version: February 2006

Petra Joerg
Institut für Finanzmanagement, Universität Bern

Claudio Loderer
Institut für Finanzmanagement, Universität Bern

Lukas Roth
The Pennsylvania State University

Urs Waelchli
Institut für Finanzmanagement, Universität Bern

© Petra Joerg, Claudio Loderer, Lukas Roth and Urs
Waelchli 2006. All rights reserved. Short sections of
text, not to exceed two paragraphs, may be quoted
without explicit permission provided that full credit,
including © notice, is given to the source.
This paper can be downloaded without charge from:
http://ssrn.com/abstract=690044
www.ecgi.org/wp

ECGI Working Paper Series in Finance

The purpose of the corporation:
Shareholder-value maximization?
Working Paper N°. 95/2005
First version : August 2005
This version : February 2006

Petra Joerg
Claudio Loderer
Lukas Roth
Urs Waelchli

We wish to thank Nancy Macmillan for the great editorial help. We received many valuable comments from Max Bazerman, Lucian Bebchuk, Sabine Boeckem, Ingolf Dittmann, Espen Eckbo, Christoph Hinkelmann, Andrew Inkpen, Mike Jensen, David Kelsey, Diego Liechti, John McConnell, Frank Milne, Bob Monks, Ted Moorman, Urs Peyer, Caspar Rose, Carolina Salva, Steve Sharpe, Meir Statman, Mich Tvede, Jim Walsh, Dariusz Wojcik, Yin-Hua Yeh, and participants at the 2005 European Financial Management Symposium on European Corporate Governance. We are grateful to Regula Baertschi, Simon Fuhrer, Corina Steiner, and Manuela Strasser for research assistance.

© Petra Joerg, Claudio Loderer, Lukas Roth and Urs Waelchli 2006. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Abstract
Allegedly, there is widespread factual and normative consensus that firms maximize shareholder value or should do so. The logic of that claim is flawed. We also argue that the maximization of shareholder value at large is an ill-defined corporate target. Moreover, we report evidence from corporate Web sites that managers are not even willing to pay lip service to shareholder-value maximization. We are unable to tell what alternative corporate target is best for society. The logic of competition, however, demands that managers meet the restrictions imposed by output markets and respond to the requests of large current and potential shareholders.

Keywords: Shareholder value, corporate target, corporate governance JEL Classifications: G30, K00, L20

Petra Joerg
Institut für Finanzmanagement, Universität Bern
Engehaldenstrasse 4
3012 Bern
Switzerland
phone: +41 31 631 4533, fax: +41 31 631 8421
e-mail: petra.joerg@ifm.unibe.ch

Claudio Loderer*
Institut für Finanzmanagement, Universität Bern
Engehaldenstrasse 4
3012 Bern
Switzerland
phone: +41 31 631 3775, fax: +41 31 631 8421
e-mail: claudio.loderer@ifm.unibe.ch

Lukas Roth
The Smeal College of Business
The Pennsylvania State University
335 Business Building University Park
PA 16802
phone: +1 814 863 9969, fax: +1 814 865 3362
e-mail: lukas.roth@psu.edu

Urs Waelchli
Institut für Finanzmanagement, Universität Bern
Engehaldenstrasse 4
3012 Bern
Switzerland
phone: +41 31 631 3478, fax: +41 31 631 8421
e-mail: urs.waelchli@ifm.unibe.ch

*Corresponding Author

The purpose of the corporation: Shareholder-value maximization?

1. Introduction
Corporate governance is a much debated topic. One reason for the debate is the recent scandals stemming from excessive managerial compensation and earnings manipulation. Critics have proposed various remedies, including better disclosure (for example, the U.S. Sarbanes-Oxley Act), separation of the positions of CEO and chairman, changes in board composition (see, for instance, the U.K. Higgs Report), and stricter codes of conduct....
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