Shareholder Wealth Maximization as a Goal of Financial Management
Financial Management which is also known as managerial or coporate finance has to do with the effective utilization of funds to ensure that the corporate goals are being achieved. Hence, the goals of financial management must conform to the goals of the firm.
Shareholder Wealth Maximization
Maximizing the wealth of shareholders through achieving the highest possible value for the firm can be said to be the broad goal of financial management. The market price of a firm's shares fluctuate from time to time depending on the operating results of the firm and other exogenous variables.
More so, wealth of shareholders is usually represented by the market price of the firm's shares. Hence, the shareholders wealth maximization is concerned with the maximization of the present value of all expected future streams of income. Note that, where there are two mutually exclusive events, th one with a higher positive net present value is usually being chosen over the other.
Now, to maximize shareholder wealth, the firm should take only those decisions that have the effect of increasing the long-term market price of the firm. This calls on the firm's financial manager to allocate its resources efficiently in order to ensure a good return on its investments after making allowances for risk.
Then, for those shareholders who are not satisfied with their return on investment, can s ll off their shares. This will however, cause market price of the firm's shares to decline. But this helps keep management in check in terms of wrong choice of investment.
It is a well-known fact that stock prices are affected by expectations of the future as well as by the economic environment and these factors cannot be directly controlled by anyone. This factor then makes the goal of shareholder wealth maximization rather difficult to attained by the financial manager. Reason being that, in a declining stock market, even firms with good earnings and favourable financial trends don't always perform well.
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Great thoughts. However, I have some exceptions.
Do we only focus on the long term? We also must understand that the current wave of tech revolution makes changes to happen so fast. Thus, focusing "only" on a long-term may sometimes result in an obsolete investment.
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Generally speaking, we shouldn't only focus on the long-term when investing but on the short-term returns as well. However, it is important to be "long-termers" especially in investments like cryptocurrency. There are projects that you can't get the best returns if you focus on the short-term.
Coming back to the subject of shareholder wealth maximization, recall this..
A successful maximization of present value should result in an increase of the future value. This is why firms focus on decisions that can ensure an increased long-term market price of the firm.
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I think small but fast achieving goal is the best because then you can change a thing with what time needs
I believe in long term investment provided that there's clear progress in the project