A firm that strives to maximize stock price should be less subject to an overemphasis on a company that simply strives to maximize profits. This is because a company focusing on stock price maximization knows that investors and potential investors look at short term gains as well as long term planning and long term investment. The stock market and its investors recognize that companies must do a certain amount of what might be referred to as investments in the future. An example of an investment of this type is the budget for research and development. A company that is focused exclusively on maximizing profits may decide not to budget adequately for research and development. The rationale would be that by reducing discretionary expenditures on short,term investments, the company will maximize profits based on the income statement formula: revenues minus expenses equal net income. The problem with this approach according to Michael Dennis in his book "Credit and Collection Handbook" is that no company can defer discretionary expenditures without negatively impacting on the long term success of the company (Dennis, 186)
14. The goal of a firm is to maximize current market value. In some cases, the following actions could be consistent with this goal:
a) The efforts by a company to improve existing employee morale and encourage retention of employees would be enhanced if that firm added a cost of living adjustment to the pensions of its retired employees. One way to improve retention is to convince workers that the company intends to take care of retirees.
b) A firm always has a decision to make about how much of its profits to pay in dividends, and how much to reinvest in the company. If current market value is measured by the market price of stock, stock analysts and professional stock investors will look at the relationship between dividends paid which make stockholders happy but do not increase the company's prod...