Question

What are some disadvantages of the maximize shareholder wealth objective function?

1) It may lead to unethical behavior by the management
2) It may result in neglecting the interests of other stakeholders
3) It may lead to short-term decision making
4) It may discourage long-term investments and sustainability
5) All of the above

Answer 1

The maximize shareholder wealth objective function has several disadvantages, including unethical behavior, neglect of other stakeholders' interests, short-term decision making, and discouragement of long-term investments and sustainability.

Step-by-step explanation:

The maximize shareholder wealth objective function has several disadvantages:

1. It may lead to unethical behavior by the management. When the sole focus is on maximizing shareholder wealth, managers may engage in unethical practices to achieve this goal.
2. It may result in neglecting the interests of other stakeholders. Shareholders are prioritized over other stakeholders such as employees, customers, and the community, leading to potential harm to these groups.
3. It may lead to short-term decision making. To maximize shareholder wealth in the short term, managers may prioritize immediate profits over long-term sustainability and growth.
4. It may discourage long-term investments and sustainability. If maximizing shareholder wealth is the primary objective, managers may hesitate to invest in long-term projects that may not have immediate financial returns.

Therefore, the correct answer is option 5) All of the above.