1. Neoclassical Economics (dominant school)
Profit maximization as the firm's goal
-why?
-good for society? (Invisible Hand, but we all know it is not true, in the 30’s, after the great depression, people thaught capitalism was dead for always)
-good for all stockholders ? profit is a accounting figure, not a real one
Problems - single period only -ignores uncertainty
2. Neolithic Finance
-Recognizes time dimension, but not uncertainty
-Balancing off future profits vs. current profits: Net Present Value (NPV)
-Will all shareholders agree now?
Note that NPV maximization is extension of profit maximization to multiple periods...but still doesn't handle uncertainty.
What if NPV is uncertain?
Investors have different risk aversion. And different optimism. Surely they disagree!
Goodbye to theory of corporate finance??
3. "Modern" Finance
-markets for risk exist (i.e. investors can become well diversified)
So all investors agree with different risk aversion can accept any project if it is worthy in itself.
How could we know if a project is worthy in itself ? We have to find a stock that has the same risk. We take the expected return of this stock (give example).
We discount the future cash flow at this rate. If the NPV is still positive, the project is worth taking.
So (summary): If markets for risk exist, If investors can fully diversify, If prices "fully reflect" available information ; Then all investors will want the firm to make decisions which maximize the current value of its stock. Furthermore, this rule will coincide with NPV maximization if no uncertainty.

Questions on "Agency" concerns >>