Should a Company Pursue Shareholder Value?

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 show that maximization of shareholder welfare does not necessarily equate to maximization of long-term shareholder value. We also show that the first objective is not sustainable in the presence of an active takeover market and that there is a tendency for public companies to behave less ethically over time. We discuss how companies can purse shareholder welfare maximization without falling prey to agency problems. *Hart: Department of Economics, Harvard University (email: [email protected]); Zingales: Booth School of Business, University of Chicago (email: [email protected]). We are grateful for feedback from audiences at the JLFA conference in Cambridge, MA (November, 2015), the National University of Singapore, the Crisis in the Theory of the Firm conference at Harvard Business School (November, 2015), the Hans-Werner Sinn retirement conference in Munich (January, 2016), the 2016 Global Corporate Governance Colloquia in Stockholm (June, 2016), and the Committee for Organizational Economics meeting in Munich (September 2016). We would also like to thank Michael Klausner for helpful comments. Luigi Zingales gratefully acknowledges financial support from the Stigler Center at the University of Chicago.