Journal of Law, Finance, and Accounting > Vol 2 > Issue 2

Companies Should Maximize Shareholder Welfare Not Market Value

Oliver Hart, Harvard University, USA, , Luigi Zingales, Booth School of Business, University of Chicago, USA,
Suggested Citation
Oliver Hart and Luigi Zingales (2017), "Companies Should Maximize Shareholder Welfare Not Market Value", Journal of Law, Finance, and Accounting: Vol. 2: No. 2, pp 247-275.

Publication Date: 06 Nov 2017
© 2017 O. Hart and L. Zingales


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In this article:
1. Introduction 
2. A Very Simple Model 
3. Implementing the Founder’s Choice 
4. Practical Issues 
5. Motivating Our Assumptions 
6. Comparison to the Literature 
7. Conclusions 


What is the appropriate objective function for a firm? We analyze this question for the case where shareholders are prosocial and externalities are not perfectly separable from production decisions. We argue that maximization of shareholder welfare is not the same as maximization of market value. We propose that company and asset managers should pursue policies consistent with the preferences of their investors. Voting by shareholders on corporate policy is one way to achieve this.