Strengths and Weaknesses of Shareholder Wealth Maximization

Strengths and Weaknesses of Shareholder Wealth Maximization
The maximization of shareholder wealth refers to the most wealth that can be brought to shareholders through the reasonable operation of finance.Scholars who hold this view believe that the purpose of shareholders to start businesses is to increase their wealth.They are the owners of the enterprise, the provider of corporate capital, and the value of its investment is that it can bring future rewards to the owner, including the acquisition of dividends and the sale of equity for cash.As a result, shareholder wealth maximization is also ultimately reflected in stock prices.

I think, of course, there are somg obvious advantages to maximizing shareholder wealth. Firstly, shareholder wealth maximization to a certain extent can overcome the enterprise in the pursuit of profit on the short-term behavior, because not only the current profits will affect stock price, expected future profits to the enterprise also can produce important influence on stock price. Secondly, the goal of shareholder wealth maximization can be clearly measured with the stock market price, which is easy to assess.

As the old saying goes, every coin has two sides, the theory of shareholder wealth maximization has its disadvantages too.

On the other hand, the pursuit of the maximization of shareholder wealth has its drawbacks. The stock price is influenced by other factors besides the influence of the financial factors, so the stock price can't accurately reflect the business performance of the company. Then, maximising shareholder wealth also requires financial markets to be effective. But it is difficult to achieve full shareholder wealth maximization because of the dispersion of shares and information asymmetry.


In my opinion, the greatest weakness of shareholder wealth maximization is its conceptual incompleteness.It applies only to listed companies and is difficult to apply to unlisted companies. It is obviously inappropriate to mention the wealth maximization of shareholders, which cannot sum up the financial goals of a large number of non-joint-stock enterprises. For example, in China, there are still a small number of joint-stock enterprises, and the proportion is not large enough to represent the overall characteristics of Chinese enterprises. Even in the western developed capitalist countries, there are many non-joint-stock enterprises.Therefore, the maximization of shareholder wealth is not broad and the compatibility is small.

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