Firm objective

Updated: Aug 20, 2021

The usual assumption is that in a market economy a firm seeks to maximize its profit. Given private ownership, however, the proper objective of the firm has to be the maximization of its value to its shareholders, represented by the market price of the company’s stocks. Alternatively, the objective can be the maximization of the expected present value of cash flow (after-tax profit less depreciation) net of the investment outlays that must be made to generate those cash flows. In certain situations the objectives of management may differ from those of the firm’s shareholders, especially in large corporations whose shareholders have little or no influence upon the operations of the company. When the control of a company is separate from its ownership, management may not always act in the best interests of the shareholders. Managers sometimes are said to be ‘satisficers’ rather than ‘maximizers’, in the sense that they may seek an acceptable level of performance, being unwilling to take reasonable risks and being more concerned Avith perpetuating their own existence than with maxiniizing the value of the firm to its shareholders. However, in order to survive over the long run, management may have to behave in a manner that is reasonably consistent with maximizing shareholders’ wealth. See also agency theory; profit maximization; satisficing.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.