Shareholder Wealth Maximisation vs. Profit Maximisation; Do share price movements provide an accurate indicator of an organisations profitability?

Student, A. (2016) Shareholder Wealth Maximisation vs. Profit Maximisation; Do share price movements provide an accurate indicator of an organisations profitability? Undergraduate thesis, University of Chichester.

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Abstract

For years, profit maximisation was regarded as the principal objective for any
commercial organisation; however, in modern business shareholder wealth
maximisation has become the leading focus. This research project endeavoured to
distinguish if there is a correlative pattern between share prices and profitability
of General Retailers in the FTSE 350, and to identify if the corporate goal of
Shareholder wealth maximisation contributes to corporate performance in terms
of profitability. By achieving this aim, a greater insight into what corporate
objective a company should pursue will be determined. Both Profit Maximisation
and Shareholder wealth maximisation contain disadvantages. The short-term
timescale concerned with maximising profits gives question over the long-standing
subsistence of a company focused entirely on maximising profits; however, the
importance of shareholders in comparison with other stakeholders of a firm is
questionable when considering maximising share value. There is much speculation
around what influences share prices; analyst’s forecasts, market efficiency, and
profit movements are all considered by different academics as being influential
factors. This research project compared 10 FTSE 350 general retailer’s share price
movements with that of their profits to assess their correlation. The data analysis
conducted revealed that the two variables generally follow a comparable line, and
appear related, however, there are anomalistic movements where the two lines
exhibit no correlative pattern suggesting other factors have an impact on share
prices. Although share prices are linked with profits, they can be impacted by
other factors, meaning seeking to maximise profit is an attainable objective,
however, seeking to maximise shareholder wealth through price movements is
less controllable and is subject to external forces. Seeking to maximise profits will
lead to increased shareholder wealth and likewise seeking to maximise
shareholder wealth must consider profit levels; regardless of the objective chosen,
the fundamental importance of profits must be acknowledged and incorporated in
order to realise success.

Item Type: Thesis (Undergraduate)
Subjects: H Social Sciences > H Social Sciences (General)
Divisions: Departments > Business School
Undergraduate Dissertations
Depositing User: Gail Graffham
Date Deposited: 17 Jan 2017 10:55
Last Modified: 17 Jan 2017 10:55
URI: http://eprints.chi.ac.uk/id/eprint/2448

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