What Is the Difference Between Value Maximization and Profit Maximization?

The difference between value maximization and profit maximization is mainly a concern of publicly traded companies. It is possible for a company to focus on more short-term measures of success such as quarterly profits. It is also possible to focus on more long-term measures, such as the amount of equity versus debt. To do the first is to focus on profit maximization. To do the second is to focus on value maximization.

The price of a publicly traded stock on any exchange will vary widely over a short period of time. Investors will react to many signals. The annual profit statements of businesses have great effect on their short-term stock prices. Over the long term, however, stock value is best increased by putting the company on a more solid footing and having a long-term business plan. Stocks are best understood as a long-term investment.

Companies that have good financials over the long term are able to pay their stockholders higher dividends, which will greatly increase the value of the stock they own. According to one understanding, this should be the main goal of any publicly traded company. This helps to insure that businesses focus on those practices that are more likely to pay rewards over a long period of time, rather than short-term or temporary gains.

Profit maximization is not entirely without merit. If a company is not turning out high enough a profit, it risks falling behind in its growth and losing market share to competitors. Most investors do care a great deal about the profit statements of any company and will try and invest their money accordingly. To attract additional investment, a company must demonstrate not only a long-term business plan, but immediate short-term success.

Both value maximization and profit maximization have been criticized from the perspective of stakeholder theory. According to this understanding, it is the proper goal of a company not only to satisfy its shareholders, but also the larger community and its employees. According to this view, a company has a fundamental duty to the larger community that made its existence possible. Much debate focuses over just how great this duty should be.