Limiting Laissez Faire Profits: The Financial Implications |
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Authors: | Herbert Kierulff Grant Learned |
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Institution: | 1.School of Business and Economics,Seattle Pacific University,Seattle,U.S.A. |
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Abstract: | Traditional corporate finance endorses the principle of stockholder wealth maximization as the purpose of business. In light
of recent scandals and legislation, businesses are increasingly expected to use financial resources in a manner which benefits
society and not just the owners of the firm. This imputation of a corporate soul will necessarily reduce investor returns,
which has at least two major financial implications for the firm and the economy. The first is that it may cause investors
to change their required rates of return and thereby change the amount of capital available to firms (in␣particular), and
the economy (in general). The second is that it may implicitly replace equity with debt in the capital structure of firms,
with all that implies for financing and corporate governance. The purpose of this article is to examine these implications
and evaluate their sometimes counterintuitive consequences. |
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