One of the universally accepted goals of any firm is to maximize the wealth; this objective states that all the decisions taken by the managers should always be focused upon maximizing the wealth of the firm’s shareholders. In simpler words, this means that when taking any decision in the business, the manager must make sure that it would eventually add to the riches of the shareholders and each decision must generate net present value (Jones & Felps, 2013). Net present value refers to the difference between the present values of the costs of any project with the present value of the benefits earned of the project. So, when the managers make a decision that results in a positive net present value, the shareholder’s wealth is created but if the decision results in negative net present value of the project, it can destroy the wealth. From here, it can be seen that the focus of the managers in this goal is to ensure that only those projects must be accepted which have a positive net present value (Santos & Barkoulas, 2007).
One major aspect that cannot be ignored is that a company that earns and creates high value for its shareholders is also an attractive firm for investment. Higher prices are paid for the shares of such companies that commence projects which create wealth for the shareholders. So, resultantly, the maximization of the wealth is also reflected in the share price in the market. Considering the perspective of financial management, the shareholder wealth maximization principle means tat the price of the common stock of the firm is maximized (Jones & Felps, 2013). And this is in the hands of the managers who consider all the risks and the relevant timing so that they can maximize the expected earnings of the share. The only purpose of this goal is to maximize the interests of the shareholders and increase their wealth. This goal is also known as the maximization of the purchasing power of the shareholders (Jensen, 2010); it is a long term objective where the managers and the firm make sure that as much wealth can be accumulated for the shareholder as possible.
References
Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of applied corporate finance, 22 (1), pp. 32--42.
Jones, T. M. & Felps, W. (2013). Shareholder wealth maximization and social welfare. Business ethics quarterly, 23 (2), pp. 207--238.
Santos, M. R. & Barkoulas, J. T. (2007). An improved pedagogy of corporate finance: a constrained shareholder wealth maximization goal. Academy of educational leadership journal, 11 (3), pp. 107--130.
