Value Maximization as an Ex-Post Consistent Firm Objective When Markets are Incomplete

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Issue Date
2007Author
Sabarwal, Tarun
Publisher
Walter de Gruyter
Type
Article
Article Version
Scholarly/refereed, publisher version
Metadata
Show full item recordAbstract
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.
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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
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