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Value Maximization as an Ex-Post Consistent Firm Objective When Markets are Incomplete
Sabarwal, Tarun
Sabarwal, Tarun
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Abstract
In competitive economies with private firm ownership, incomplete markets, and firm shareholders
changing over time, several firm objectives have been proposed. Some are useful to understand
efficiency of equilibria, and others are explicitly consistent with majority shareholder
control or collective choice rules, but it is not always clear if versions of each type are consistent
with versions of the other type. This paper shows that ex-post, value maximizing rules, (including
those proposed by Dreze, and Grossman and Hart,) are consistent with shareholder preferences in
such economies; that is, along the equilibrium path, in every period and state of the world, every
coalition of a firm’s shareholders in that period and state approves a value maximizing production
plan. This result applies to cases when shareholders within a firm and across firms can form
coalitions, and when stock trading can be ex-dividend or cum-dividend, and with a combination of
both. This result does not resolve the problem of inefficiency of stock market equilibria, or that of
ex ante disagreement among shareholders. It can help understand when firm objectives with some
desirable properties are consistent with a particular version of shareholder control, and it provides
a stability criterion (in terms of robustness to shareholder coalitions) for organizing productive
resources in such economies.
Description
This is the publisher's version. Also available electronically from: http://dx.doi.org/10.2202/1935-1704.1334.
Date
2007
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Walter de Gruyter
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Keywords
Incomplete markets, Firm objective, Value maximization, Shareholder preferences
Citation
Sabarwal, Tarun (2007): “Value Maximization As An Ex-Post Consistent Firm Objective When Markets are Incomplete,” The B.E. Journal of Theoretical Economics, 7(1) (Topics), Article 4. http://dx.doi.org/10.2202/1935-1704.1334