Goal of the Corporate Firm

• The traditional answer is that the managers of the corporation are obliged to make efforts to
maximize shareholder wealth.
• Alternatively, the goal of the financial manager is to maximize the current value per share of
the existing stock

The Set-of-Contracts Perspective

• The firm can be viewed as a set of contracts.
• One of these contracts is between shareholders and managers.
• The managers will usually act in the shareholders’ interests.
– The shareholders can devise contracts that align the incentives of the managers with the
goals of the shareholders.
– The shareholders can monitor the managers behavior.
• This contracting and monitoring is costly.