Goals of Financial Management

Maximizing Shareholder and Market Value

A goal of financial management can be to maximize shareholder wealth by paying dividends and/or causing the market value to increase.

Introduction

Financial management is concerned with financial matters for the practical significance of the numbers, asking: what do the figures mean? There are several goals of financial management, one of which is maximizing shareholder and market value.

Money to Shareholders Maximizing shareholder and market value is, for some, one of the goals of financial management.

Maximizing Shareholder Value

The idea of maximizing shareholder value comes from interpretations of the role of corporate governance. Corporate governance involves regulatory and market mechanisms and the roles and relationships between a company's management, its board, its shareholders, other stakeholders, and the goals by which the corporation is governed.

In large firms where there is a separation of ownership and management, and no controlling shareholder, the principal–agent issue arises between upper management (the "agent") and shareholders (the "principals"). The danger is that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.

Thus, one interpretation of proper financial management is that the agents are oriented toward the benefit of the principals – shareholders – by increasing their wealth by paying dividends and/or increasing the stock price or market value.

Maximizing Market Value

The idea of maximizing market value is related to the idea of maximizing shareholder value, as market value is the price at which an asset would trade in a competitive auction setting; for example, returning value to the shareholders if they decide to sell shares or if the firm decides to sell.

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American (US and UK) "model" tends to emphasize the interests of shareholders.

The sole concentration on shareholder value has been widely criticized, particularly after the late-2000s financial crisis, where attention has risen to the concern that a management decision can maximize shareholder value while lowering the welfare of other stakeholders. Additionally, short-term focus on shareholder value can be detrimental to long-term shareholder value.