The Objective In Decision Making

"If you do not know where you are going, it does not matter how you get there "

Anonymous

Corporate finance's greatest strength and its greatest weaknesses is its focus on value maximization. By maintaining that focus, corporate finance preserves internal consistency and coherence, and develops powerful models and theory about the "right" way to make investment, financing and dividend decisions. It can be argued, however, that all of these conclusions are conditional on the acceptance of value maximization as the only objective in decision-making.

In this chapter, we consider why we focus so strongly on value maximization and why, in practice, the focus shifts to stock price maximization. We also look at the assumptions needed for stock price maximization to be the right objective, the things that can go wrong with firms that focus on it and at least partial fixes to some of these problems. We will argue strongly that, even though stock price maximization is a flawed objective, it offers far more promise than alternative objectives because it is self-correcting.

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