Stakeholder

Stakeholder

Stakeholders, Shareholders and Wealth Maximization
V. Sivarama Krishnan, University of Central Oklahoma
ABSTRACT
This paper attempts reconciliation between the two somewhat extreme views
espoused by the shareholder wealth maximization paradigm and the stakeholder
theory. The stakeholder theory challenges the basic premise built into corporate
finance theory, teaching and practice. Corporate finance theory, teaching and the
typically recommended practice are all built on the premise that the primary goal of
a corporation should be shareholder wealth value maximization. Extant theoretical
and empirical research in financial economics also generally accept shareholder
wealth maximization as the normative and ideal goal on which all business decisions
should be based. This paradigm assumes that there are no externalities and all the
participants engaged in transactions with the firm are voluntary players competing
in free, fair and competitive markets. A very different view is offered by what is
loosely called stakeholder theory. The stakeholder theory posits that the focus on
shareholders and firm value is misplaced and managers should be concerned with
all stakeholders of the firm. The paper attempts to address what is felt as a lack of
dialogue between the two camps.

INTRODUCTION
Corporate finance theory, teaching and the typically recommended practice at least in the US
are all built on the premise that the primary goal of a corporation should be the maximization of
shareholder value. Extant theoretical and empirical research in financial economics also generally
accepts shareholder wealth maximization as the normative and ideal goal on which all business
decisions should be based. A quick survey of several corporate finance textbooks reveals this
approach (Brealey and Myers (2003), Brigham and Ehrhardt (2002), Moyer, McGuigan and Kretlow
(2003)). Jensen (2001) citing over 200 years of work in economics and finance, forcefully argues...

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