Shareholder Value Theory

The meaning of shareholder in the first place is any person or company that has at least one share of a company’s stock. When the company is successful, the shareholders of the company will get the benefit. The benefit will be in the form of increased stock valuation. Shareholder value theory or also known as shareholder primacy theory or shareholder wealth maximization is the concept of management philosophy. Milton Friedman is the person who was originally proposed the shareholder theory. Based on this term, it is important to measure in what extent the company in order to enrich the shareholders.

In management, agent of the shareholders can be hired. The agent is hired to run the company for the benefit of the shareholders. The agent

Market capitalization is actually the value of the company or in common is called as market cap. It is the total dollar market value of a company’s outstanding shares. The value is traded on the stock market. The way it is calculated is by multiplying the total number of shares of the company by the present share price. Usually the investment community will used this figure in order to determine the size of a company compared to the sales and total asset figures of a company.

Besides that, there are two things that should outperform certain bench-marks which are specific concept for the actions that should be taken by the management and on the returns to the shareholders. As an example, the concept of cost of capital. The concept of cost capital is where a firm or a company raising their funds from various sources and different sources of fund will have different costs. For instance, the cost of raising funds by issuing equity shares will be different with the cost of raising funds by issuing preference shares. Since a firm or a company invests the funds in various assets, therefore the returns that should be return should be higher than or at least equal to the cost of raising the

The term in this sense was introduced by Alfred Rappaport in 1986, which is best known for developing the idea of shareholder value. Currently, the shareholder theory can be seen as the old way of the companies doing business. This is because by focusing or concentrating more towards the interest of the shareholders it will cause negative consequences or disadvantages. There are two consequences that involved which can be identified as the most danger. The consequences are a focus on short terms strategy and also greater risk taking. As an example, when shareholder theory is applied, it can cause continuous pressure upon the manager. The manager is pressured to increase the returns to the shareholders. This can caused or lead the manager to manipulate the account of the company. This situation can be seen during the demise of corporations of Enron and Worldcom. By this it shows that the shareholders are highly or likely to be at risk and the shareholders have the rights to intervene the business