Gil Skillman wrote: > So to the extent that firm managers respond to the concerns > of equity holders, they will act as though "greedy"--that is, > operate the firm so as to maximize (the expected present value > of) profit.
I believe Gil meant expected present value of future cash flows/net income/residual income or some such thing, assuming that the managers' compensation schemes are "sufficiently goal congruent", that is, sufficiently strong to "induce" them to follow that path. But why is the below so certain: > Given competitive markets (or indeed, just competitive markets for > firm equity shares), it can be shown that, whatever their personal > consumption goals, people who own equity shares in a given firm will > want that firm to maximize profits. For example, what if suddenly the shares of the Nesin Foundation in Turkey, which houses orphans and funds their education until they are able to earn their own bread, become competitive because a large number of people become interested in owning its shares since the foundation pays more to the orphans that they are dieing to help than other competing foundations? The more the funds the foundations spend on the orphans, the more expensive their shares get, since those who are willing the help the orphans have more to pay to these funds to satiate their locally non-satiable utilities by helping the orphans. In this case, wouldn't the Nesin foundation want to maximize its loss which, unless there are some contraints, is infinite? May Aziz Nesin, the founder of the Nesin Foundation, one of the greates writers of all times of my part of the world, rest in peace. Sabri -- Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901
