Problems and Indications of Shareholders Wealth Maximization

Problems of Shareholders Wealth Maximization

Drawbacks, limitations of shareholders wealth maximization are given in the diagram below.

Image credits © Manoj Patil.

Disadvantages of shareholders wealth maximization

1. Wrong Assumptions,
2. Speculation,
3. Different Objectives,
4. Fair Treatment To All Social Groups

Problems involved in implementing goal of maximization of shareholders wealth

1. Wrong Assumptions

The Maximization of Shareholder's wealth wrongly assumes that there is an efficient capital market. In fact, the Share Price in the Market is subject to wide variations.

2. Speculation

Speculative activities lead to wide fluctuations in price of shares. Because an investor cares more for safety and security of investment whereas a speculator is interested in appreciation of his capital and profits.

3. Different Objectives

In every organization, there are three basic investors namely Shareholders, Professional Managers and Creditors. At times, they are found to be pulling in different directions resulting into conflicts.

4. Fair Treatment To All Social Groups

It is argued that a company is not concerned with shareholders alone. Employees, customers, creditors, local societies at large are also connected with the company. A business enterprise has to operate as a socially responsible entity. It has to honor certain obligations towards different social groups.

Indications of Shareholders Wealth Maximization

Signs, signals of Shareholders Wealth Maximization are given in the diagram below.

Image credits © Manoj Patil.

Hints of shareholders wealth maximization

1. Increase in Market Value of Securities / shares.
2. Shareholders get a regular payment of dividend at higher rates.
3. Indications of shareholder's wealth maximization are rights issue at a low premium.
4. Shareholders receive issue of Bonus Shares after a gap of 3 to 4 years.
5. Indication of shareholder's wealth maximization is the high book Value of Shares.