Working Paper: NBER ID: w23460
Authors: Vikas Mehrotra; Randall Morck
Abstract: Economic models routinely assume firms maximize shareholder wealth; however common law legal systems only require that officers and directors pursue the interests of the corporation, leaving this ill-defined. Economic arguments for shareholder wealth maximization derived from shareholders’ status as residual claimants are vulnerable on several fronts. Share valuations fluctuate as sentiment shifts. Introductory finance casts firms as maximizing expected net present values, which are quasirents, expected earnings beyond expected costs of capital from investors, to which shareholders have no obvious claim. Other stakeholders – entrepreneurial founders or CEOs, employees, employees, customers, suppliers, communities or governments, having made firm-specific investments, may exert stronger claims than atomistic public shareholders have to shares of their firms’ quasirents. Consistent with this, their contractual claims are often augmented by residual claims and liabilities. Still, shareholder value maximization constitutes something of a bright line; whereas stakeholder welfare maximization is an ill-defined charge to assign boards that gives self-interested insiders broader scope for private benefits extraction. The common law concept of “the interests of the corporation” captures this ambiguity.
Keywords: corporate governance; stakeholders; quasirents; economic profit; efficient contracts; implicit contracts; contractual claimants; residual claimants
JEL Codes: G3; K12; K22; L2; P1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| maximizing shareholder value (L21) | misalignment of interests between shareholders and other stakeholders (G34) |
| misalignment of interests between shareholders and other stakeholders (G34) | agency problems (G34) |
| stronger claims of other stakeholders (G38) | broader scope for private benefits extraction by corporate insiders (G34) |
| fiduciary duty of directors (G34) | ambiguity in prioritizing stakeholder interests (D72) |
| ambiguity in prioritizing stakeholder interests (D72) | conflicts between maximizing shareholder value and addressing needs of other stakeholders (G34) |