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How is the wealth of shareholders maximized?

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Quick Answer

A corporation maximizes the wealth of its shareholders by investing in income-generating assets, growing its credit to gain access to more capital and by saving a portion of its earnings. To maximize shareholder wealth, a company focuses on increasing earnings per share and dividend payouts. A business should invest in conservative investments based on its duty to protect shareholders' capital and maximize shareholder value.

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Debate continues on whether the maximization of shareholder value should be a corporation's main objective. Critics of maximizing shareholder wealth claim that most companies sacrifice the welfare of employees and customers in the pursuit of higher stock prices. They argue that a company should focus on satisfying its customers and employees, instead of focusing solely on increasing shareholder wealth. One such critic was management expert Peter Drucker, who believed that the only reason a company exists is to create a customer. He strongly opposed the concept of maximizing shareholder wealth.

Supporters of maximizing shareholder value claim that it should be a primary objective, as it results in increased value for employees, society and the shareholders. They also argue that maximizing shareholder value is crucial because of the risks taken by shareholders in owning the business. Maximizing shareholder wealth creates the agency problem between managers and shareholders who have conflicting interests.

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