Stock Price Maximization and Social Welfare

The Security Industry Association's web site, http:// www.sia.com, is a great source of information. To find data on stock ownership, go to their web page, click on Reference Materials, click on Securities Industry Fact Book, and look at the section on Investor Participation.

If a firm attempts to maximize its stock price, is this good or bad for society? In general, it is good. Aside from such illegal actions as attempting to form monopolies, violating safety codes, and failing to meet pollution requirements, the same actions that maximize stock prices also benefit society. Here are some of the reasons:

1. To a large extent, the owners of stock are society. Seventy-five years ago this was not true, because most stock ownership was concentrated in the hands of a relatively small segment of society, comprised of the wealthiest individuals. Since then, there has been explosive growth in pension funds, life insurance companies, and mutual funds. These institutions now own more than 57 percent of all stock. In addition, more than 48 percent of all U.S. households now own stock directly, as compared with only 32.5 percent in 1989. Moreover, most people with a retirement plan have an indirect ownership interest in stocks. Thus, most members of society now have an important stake in the stock market, either directly or indirectly. Therefore, when a manager takes actions to maximize the stock price, this improves the quality of life for millions of ordinary citizens.

2. Consumers benefit. Stock price maximization requires efficient, low-cost businesses that produce high-quality goods and services at the lowest possible cost. This means that companies must develop products and services that consumers want and need, which leads to new technology and new products. Also, companies that maximize their stock price must generate growth in sales by creating value for customers in the form of efficient and courteous service, adequate stocks of merchandise, and well-located business establishments.

People sometimes argue that firms, in their efforts to raise profits and stock prices, increase product prices and gouge the public. In a reasonably competitive economy, which we have, prices are constrained by competition and consumer resistance. If a firm raises its prices beyond reasonable levels, it will simply lose its market share. Even giant firms such as General Motors lose business to Japanese and German firms, as well as to Ford and Chrysler, if they set prices above the level necessary to cover production costs plus a "normal" profit. Of course, firms want to earn more, and they constantly try to cut costs, develop new products, and so on, and thereby earn above-normal profits. Note, though, that if they are indeed successful and do earn above-normal profits, those very profits will attract competition, which will eventually drive prices down, so again, the main long-term beneficiary is the consumer.

3. Employees benefit. There are cases in which a stock increases when a company announces a plan to lay off employees, but viewed over time this is the exception rather than the rule. In general, companies that successfully increase stock prices also grow and add more employees, thus benefiting society. Note too that many governments across the world, including U.S. federal and state governments, are privatizing some of their state-owned activities by selling these operations to investors. Perhaps not surprisingly, the sales and cash flows of recently privatized companies generally improve. Moreover, studies show that these newly privatized companies tend to grow and thus require more employees when they are managed with the goal of stock price maximization.

Each year Fortune magazine conducts a survey of managers, analysts, and other knowledgeable people to determine the most admired companies. One of Fortune's key criteria is a company's ability to attract, develop, and retain talented people. The results consistently show that there are high correlations among a company's being admired, its ability to satisfy employees, and its creation of value for shareholders. Employees find that it is both fun and financially rewarding to work for successful companies. So, successful companies get the cream of the employee crop, and skilled, motivated employees are one of the keys to corporate success.

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Responses

  • lealdo manna
    How does the goal of maximizing share price benefit society at large?
    8 years ago
  • eden
    What is maximisation of stock price?
    8 years ago
  • aurelia
    Is stock price maximisation good or bad for society?
    8 years ago
  • gebre
    Is stock price maximization good or bad for society?
    7 years ago
  • diamanda
    How maximize stock prices benefit society?
    8 years ago
  • Fiyori
    Why maximize stock price benefit society?
    7 years ago
  • alyx
    Is stock price maximazation good or bad for society?
    7 years ago
  • Regolo
    Is the goal of maximizing the stock price good for the society?
    6 years ago
  • Miriam Macleod
    Is maximiziang stock prices good or bad for society?
    6 years ago
  • Lucy
    How do consumers benefit from companies maximizing stock prices?
    6 years ago
  • Jemima
    Is stock price maximation good or bad for society?
    5 years ago
  • daniela baresi
    How does stock price maximization benefits society?
    4 years ago
  • CILLIAN
    Is stock price maximization illegal?
    3 years ago
  • iole davide
    How do you measure stock price maximization?
    5 months ago

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