Corporate Finance

Shareholder wealth maximisation

1

Corporate finance theory outlines that the main agenda of the management of a firm is to maximize the wealth of its shareholders. They do this by increasing the company’s share price or dividend. 

2

Consequently, when a company has plenty of cash available, they essentially have two main options: to pay this money out as a dividend or to use it on new projects that will grow the value of the company.

3

If a company has a lot of cash building up but isn’t doing anything with it, this is a concern for investors. It is a sign that the company is inefficiently managing money and may not be benefiting shareholders.

4

Another concern is executive pay. If the management of a company are paying themselves larger and larger bonuses, this is maybe a sign that they are focused on their own wealth and not that of shareholders.

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