Stock price maximization is the most restrictive of the three objective functions. It requires that managers that managers take decisions that maximize stockholder wealth, that bondholders be fully protected from expropriation, that markets be efficient and that social costs be negligible.
Stockholder wealth maximization is slightly less restrictive, since it does not require that markets be efficient. Firm value maximization is the least restrictive, since it does not require that bondholders be protect from expropriation.
Thus, when we make the argument that an action by a firm (such as investing or financing) increase firm vale,this increase in firm value will necessarily translate into increasing stockholder wealth and stock price only if the more restrictive assumptions hold. Conversely,an action that stock price in a world where the less restrictive assumptions do not hold may not necessarily increase firm value.
Stockholder wealth maximization is slightly less restrictive, since it does not require that markets be efficient. Firm value maximization is the least restrictive, since it does not require that bondholders be protect from expropriation.
Thus, when we make the argument that an action by a firm (such as investing or financing) increase firm vale,this increase in firm value will necessarily translate into increasing stockholder wealth and stock price only if the more restrictive assumptions hold. Conversely,an action that stock price in a world where the less restrictive assumptions do not hold may not necessarily increase firm value.
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