shareholder wealth by harvard
ISSN 1045-6333
THE SHAREHOLDER WEALTH
MAXIMIZATION NORM AND
INDUSTRIAL ORGANIZATION
Mark J. Roe
Discussion Paper No. 339
11/2001
Harvard Law School
Cambridge, MA 02138
The Center for Law, Economics, and Business is supported by a grant from the John M. Olin Foundation.
This paper can be downloaded without charge from:
The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/ SHAREHOLDER WEALTH MAXIMIZATION
JEL Class: D42, G32
THE SHAREHOLDER WEALTH MAXIMIZATION NORM
AND INDUSTRIAL ORGANIZATION
MARK J. ROE†
ABSTRACT
Industrial
organization affects the relative effectiveness of the shareholder wealth maximization norm in maximizing total social wealth. In nations where product markets are not strongly competitive, a strong shareholder primacy norm fits less comfortably with social wealth maximization than elsewhere because, where competition is weak, shareholder primacy induces managers to cut production and raise price more than they otherwise would. Where competition is fierce, managers do not have that option. There is a rough congruence between this inequality of fit and the varying strengths of shareholder primacy norms around the world. In
Continental Europe, for example, shareholder primacy norms have been weaker than in the United States. Historically, Europe’s fragmented national product markets were less competitive than those in the United States, thereby yielding a fit between their greater skepticism of the norm’s value and the structure of their product markets. As Europe’s markets integrate, making its product markets more competitive, pressure has arisen to strengthen shareholder norms and institutions.
† Thanks for comments go to Ian Ayres, Einer Elhauge, and Louis Kaplow.
SHAREHOLDER WEALTH MAXIMIZATION
Table of Contents
Introduction ........................................................................................ 2
I.
Scope
THE SHAREHOLDER WEALTH
MAXIMIZATION NORM AND
INDUSTRIAL ORGANIZATION
Mark J. Roe
Discussion Paper No. 339
11/2001
Harvard Law School
Cambridge, MA 02138
The Center for Law, Economics, and Business is supported by a grant from the John M. Olin Foundation.
This paper can be downloaded without charge from:
The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/ SHAREHOLDER WEALTH MAXIMIZATION
JEL Class: D42, G32
THE SHAREHOLDER WEALTH MAXIMIZATION NORM
AND INDUSTRIAL ORGANIZATION
MARK J. ROE†
ABSTRACT
Industrial
organization affects the relative effectiveness of the shareholder wealth maximization norm in maximizing total social wealth. In nations where product markets are not strongly competitive, a strong shareholder primacy norm fits less comfortably with social wealth maximization than elsewhere because, where competition is weak, shareholder primacy induces managers to cut production and raise price more than they otherwise would. Where competition is fierce, managers do not have that option. There is a rough congruence between this inequality of fit and the varying strengths of shareholder primacy norms around the world. In
Continental Europe, for example, shareholder primacy norms have been weaker than in the United States. Historically, Europe’s fragmented national product markets were less competitive than those in the United States, thereby yielding a fit between their greater skepticism of the norm’s value and the structure of their product markets. As Europe’s markets integrate, making its product markets more competitive, pressure has arisen to strengthen shareholder norms and institutions.
† Thanks for comments go to Ian Ayres, Einer Elhauge, and Louis Kaplow.
SHAREHOLDER WEALTH MAXIMIZATION
Table of Contents
Introduction ........................................................................................ 2
I.
Scope