The major criticism of wealth maximization objective
This paper will discuss why there should be limits placed on property Competitive product, labor, and capital markets counter the pull of incentives to maximize shareholder wealth at the expense of other stakeholders.
Is it a long-term profit or a short-term profit? Numerous writings articulate the principle, including the influential Friedman and Jensen It considers the time value of money. It emphasizes on short-term goals.
His criticism is valid, for it touches on points that do in fact prove his theory, in a single persuading and convincing piece, particularly concerning the discrepancies Both elements are desired by almost all humanity.
To assess whether the Friedmanian position is tenable, first consider the arguments used to support it.
Why is shareholders wealth maximization important
Profit provides a cushion for any random risk arising at any time. The aim of the single producer was to retain his position in the market and sustain growth, thereby earning some profit which would help him in maintaining his position. It is because the money received in earlier period may be reinvestable to earn more. However, unlimited profit maximization cannot be defended by any reasonable ethical theory. Desire for wealth made human beings devalue relationships, health, morality A business concern is also functioning mainly for earning profit. Secondly, profit maximization presents a shorter term view as compared to wealth maximization. The objective is not descriptive of the policies the firm has to adapt to achieve wealth maximization. You have been drawn into the story and it is almost like you are there, living along side the characters. Through the process of discounting, wealth maximisation takes care of the quality of cash flow.
He cannot guarantee profits in the long term because of business uncertainties. If both the conditions support an organization, it tastes the success.
Profit maximization vs wealth maximization essays
Without profit, a business cannot survive. Stakeholders will be inclined to make moral claims to stymie counter arguments. Expounding on Financial Goals i. The merits of pursuing other objectives is a normative question. Thus, the decision function of management can be broken down into three major areas: the investment, financing, and asset management decisions. Companies sticking to this policy stick to the same product line without modification or upgradation. It begins with a determination of the total amount of assets needed to be held by the firm. Desire for wealth makes our society a real pandemonium. The firm enjoys good sales which lead to more profits and better cash flows and therefore achieve wealth creation. This is the difference between the actual return forgone from the alternative investment, olowe noted that the maximization of shareholders wealth is the most superior of all the objectives considers timing of return, take account of both return and risk and it balances short and long-term benefits. Differences in interpretation of the concept of profit thus expose the weakness of profit maximization.
Capital investment decisions of a firm have a direct relation with wealth maximization.
based on 89 review