Aswath Damodaran 4
The Classical Viewpoint
! Van Horne: "In this book, we assume that the objective of the firm is to
maximize its value to its stockholders"
! Brealey & Myers: "Success is usually judged by value: Shareholders are
made better off by any decision which increases the value of their stake in the
firm... The secret of success in financial management is to increase value."
! Copeland & Weston: The most important theme is that the objective of the
firm is to maximize the wealth of its stockholders."
! Brigham and Gapenski: Throughout this book we operate on the assumption
that the management's primary goal is stockholder wealth maximization
which translates into maximizing the price of the common stock.
I picked four widely used books and quoted the “value maximization” objective
statement from each of the books to illustrate two points:
- Value maximization as an objective function is pervasive in corporate
financial theory
- Not enough attention is paid to defending this objective function in
most corporate finance books. The assumption is that all readers will
accept this objective function, which is not necessarily true.
- It is also interesting that these four books also state the objective functions
differently - Van Horne as “stockholders value maximization”, Brealey and
Myers and Copeland and Weston as stockholder wealth maximization and
Brigham and Gapenski as the maximization as the stock price.
- Question to ask :
- Are these objective functions equivalent?
- If not, which assumption is the least restrictive and which is the most
restrictive?
- What are the additional assumptions needed to get from the least to the most
restrictive objective functions?
