Shareholder Wealth Maximization

The principle of shareholder wealth maximization (SWM) holds that a maximum return to shareholders is and ought to be the objective of all corporate activity. From a financial management perspective, this means maximizing the price of a firm’s common stock. In pursuing this objective, managers consider the risk and timing associated with expected earnings per share to maximize the price of the firm’s common stock. When this is properly executed, management will also have maximized the future stream of dividends and capital gains that accrue to its shareholders. The most defensible form of SWM looks to long-term rather than short-term maximization.

The maximization of shareholder wealth is described as the “monotonic” view of the purpose of the corporation and, therefore, of the responsibilities of its managers. ...