How do companies maximize shareholder wealth?


Quick Answer

According to the Harvard Business Review, companies maximize shareholder value by managing their relationships with all of their stakeholders. Companies use a variety of strategies and investment options to maximize the wealth of their shareholders and create value for customers.

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How do companies maximize shareholder wealth?
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Full Answer

Maximizing shareholder value is the main goal of all corporations. Equity capital raised from shareholders is a scarce resource with an opportunity cost, according to CBIZ Valuation Group. Economic Value Added (EVA) measures the opportunity cost of raising capital in order to calculate the risk associated with maximizing shareholder wealth. EVA stipulates that a business creates value for its shareholders when its net earnings are greater than the opportunity cost of raising capital. In contrast, businesses that have net earnings lower than the cost of raising capital do not create value for shareholders.

According to the Houston Chronicle, corporations can also maximize shareholder wealth by building their credit, investing in real estate or investment products and boosting stock prices. Building credit gives corporations greater access to large sums of capital with favorable loan terms, which allows for financial expansion and wealth generation. Corporations that invest in real estate can maximize shareholder value by renting out unused real property and excess productive capacity. Corporations can also boost stock prices to increase earnings per share and dividend payouts.

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