The value of a firm

In general, a firm is related to different interests of different groups. The closed system of a firm is broken through by plenty of different desires and different demands by other actors aside the shareholders. Beside the investing shareholders, other actors are related to the firm, who have their own preferences and try to satisfy their needs.8 For example the management, suppliers, customers or employees, who have different objectives concerning the firm, may be these actors. But as these preferences differ intensively, conflicts within the decision making process of the firm may occur. So, a consolidated approach has to be chosen, that meet any expectation.9

Beside the conflicts within the subset of stakeholders, conflicts may also occur between owner and manager. This is called principal-agent problem. The owner of the firm (principal) transfers special assignments to the manager (agent) and wants him to execute these. The specialized labour force and information provided by the agent is the advantage of the principal. Assuming that both actors are utility maximizers, “there is a good reason to believe that the agent will not always act in the best interests of the principal”.10

As a homogenous objective is not possible to generate, the capital orientated perspective of the financial theory tries to develop an approach that fits any decision making process. 11

The advantage of cash-flow might be chosen independently disregarding the different preferences. The choice of specific investments12 may only be done regarding their price or rather their market value.

Now, the decisions of the management cover the expectations of the investors and shareholders.13 So the conflict free market value meets the utility function of any stakeholder. 14 Consequently the management has to force the enhancement of the market value. If this is not possible, investments should not be made.

Since the 1980s, the definition of shareholder value has been gainged more importance. In the first instance, the shareholder value has been understood as a model to assess investments. Later on, the shareholder value became an evaluation standard, which was able to assess the complete performance of a firm.15 The objectives of shareholders and the capital market are internalized with the help of the shareholder value orientation. The internal firms’ objectives are deduced by these external objectives.16