Profit Maximization Objectives

There are objectives that focus on profitability rather than value. The rationale for them is that profits can be measured more easily than value, and that higher profits translate into higher value in the long term. There are at least two problems with these objectives. First, the emphasis on current profitability may result in short term decisions that maximize profits now at the expense of long-term profits and value. Second, the notion that profits can be measured more precisely than value may be incorrect, given the leeway that accountants have to shift profits across periods.

In its more sophisticated forms, profit maximization is restated in terms of accounting returns (such as return on equity or capital) rather than dollar profits or even as excess returns (over a cost of capital). While these variants may remove some of the problems associated with focusing on dollar profits next period, the problems with accounting measurements carry over into them as well.

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