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I think your argument hinges on the validity of
(6) For shareholders with well-diversified portfolios, "maximising shareholder value" entails maximising the (suitably weighted) share values of the corporations in their portfolios.
I don't think it is.

For any portfolio the return is a (suitably) weighted average of the returns of the constituent assets, irrespective of diversification.

Now, diversified portfolios arise precisely because maximizing return is not the only criterion by which investors make their investment decisions. So, in the specific case of investors with diversified portfolios, it is not only maximising the portfolio return that they're interested in.

The focus on share value (and return) comes from

(2) Running a corporation in the interests of its shareholders, commonly described as "maximising shareholder value", and this is generally taken to mean maximising the value of the shares.
The value of a stock to an investor may or may not come from its return. For those few with large stakes in it it appears to at first sight, but if their holdings are too large to liquidate quickly, they are "married" to the company for a longer period of time than the average investor, and so have an interest not just in maximising the immediate return to their investment, but in ensuring the continued health of the company for some period of time. For the large majority of investors with small holdings, those are presumably for diversification purposes, and for these minimising risk is as important as maximising return.

So it would appear that the identification of shareholder value with stock price is the weak link of the whole argument, and indeed I would say it's just a specious argument by ideologues bent on justifying notorious excesses by pseudoscientific use of economic arguments.

Where does this argument actually come from? Thomas Friedman?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sat Dec 23rd, 2006 at 01:33:16 PM EST
Indeed. I've updated the diary to read
(2) Running a corporation in the interests of its shareholders, commonly described as "maximising shareholder value", and this is generally taken to mean (at least to a good approximation) maximising the value of the shares.
....
(6) For a corporation to serve the financial interests of shareholders holding well-diversified portfolios, "maximising shareholder value" entails maximising the (suitably weighted) share values of the corporations in their portfolios. (This isn't exactly correct, since investors value not just the "share value", but its effect on portfolio-level risk, etc., but it is a good approximation and can serve as shorthand.)

Regarding the origin of this interpretation of "shareholder value", I don't know, but the definitions in Wikipedia: Shareholder value suggest that it is widespread. Isn't it a good approximation for typical investors, provided that the price reflects the actual value of the company, rather than a confused or fraudulent valuation? (That is, absent the considerations I discuss.)

Note that my purpose is not to praise stock-value = stockholder-value, but to bury or at least dirty it.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Sat Dec 23rd, 2006 at 07:16:55 PM EST
[ Parent ]
PN: the value of the shares is the value at a particular point in time. What people are interested in is the return rate, that is, the value of the shares with reference to at least two time points: when the shares were bought and now. So if "Shareholder value = share value" is to make any sense, "share value = share return".

The "best" way to increase the return rate of a company is a speculative bubble around it. As long as the investor gets off the bubble before it pops, he can get fantastic returns, and the returns are the larger the closer to the popping one gets. Sort of like playing blackjack with the timing of the bubble ;-)

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sun Dec 24th, 2006 at 04:43:07 AM EST
[ Parent ]

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