Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-25T08:18:59.686Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Arrow, K.J.Social Choice and Individual Values. New York: John Wiley and Sons, Inc. (1961).Google Scholar
[2]Ekern, S. and Wilson, R.. “On the Theory of the Firm in an Economy with Incomplete Markets.” Bell Journal of Economics and Management Science, Vol. 5 (Spring 1974), pp. 171–180.Google Scholar
[3]Fama, E.F. and Miller, M.H.. The Theory of Finance. New York: Holt, Rinehart, and Winston (1972).Google Scholar
[4]Fischer, S. “The Demand for Index Bonds.” Journal of Political Economy, Vol. 83 (06 1975), pp. 509–534.CrossRefGoogle Scholar
[5]Hirshleifer, J.Investment, Interest, and Capital. New Jersey: Prentice-Hall, Inc. (1970).Google Scholar
[6]LeRoy, S.F. “Stock Market Optimality: Comment.” Quarterly Journal of Economics, Vol. 90 (02 1976), pp. 150–155.CrossRefGoogle Scholar
[7]Merton, R.C. and Subrahmanyam, M.G.. “The Optimality of a Competitive Stock Market.” Bell Journal of Economics and Management Science, Vol. 5 (Spring 1974), pp. 145–170.Google Scholar
[8]Radner, R. “A Note on Unanimity of Stockholders' Preferences among Alternative Production Firms: A Reformulation of the Ekern-Wilson Model.” Bell Journal of Economics and Management Science, Vol. 5 (Spring 1974), pp. 181–184.Google Scholar
[9]Rubinstein, M. “An Aggregation Theorem for Securities Markets.” Journal of Financial Economics, Vol. 1, No. 3 (1974), pp. 225–244.CrossRefGoogle Scholar
[10]Salter, W.E.G.Productivity and Technical Change. Cambridge: Cambridge University Press (1960).Google Scholar
[11]Starr, R.M. “Optimal Production and Allocation under Uncertainty.” Quarterly Journal of Economics, Vol. 87 (02 1973), pp. 81–95.CrossRefGoogle Scholar