What is the difference between profit maximization and maximization of shareholder wealth?

Profit and Shareholder Maximization

Shareholder wealth (more commonly referred to as shareholder ‘value’) is talking about the value of the company generally expressed in the value of the stock. Profit maximization refers to how much dollar profit the company makes. It might seem like making as much profit as possible would yield the highest value for the stock but that is not always the case.

When investors look at a company they not only look at dollar profit but also profit margins, return on capital and other indicators of efficiency. Say there are two companies doing the same thing. Company A had sales of $100 million and profit of $10 million. Company B had sales of $200 million and profit of $12 million. Wall Street could look at Company B and say they are less valuable because they clearly do no operate as efficiently as Company A. So even though Company B had more profit Company A will have more shareholder value.

And to answer the next question, yes companies often decide to forgo marginal increases in profit if they feel the lower margins on the incremental gains in profit will have a negative impact share price. They actually increase shareholder value by NOT making more profit.

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