Saturday, February 20, 2016

Is Maximizing Share Price Equals To Maximizing Shareholders' Value?‏

If you ask any CEO of a company, he or she would tell you that their main objective for running the company is to maximize shareholders’ value. 

Maximizing shareholders’ value is subjective because as shareholders, we all want different kind of things. Some want better sustainability reporting or others may want higher dividends. There are probably another group who wants the company share price to ascend upwards in due time. But does share price equals to maximizing shareholders’ value? 

There are researchers who went around different companies to interview their CEOs and they divulged that they get mounting pressure to increase the share price of the company and inflate the market capitalization. For anyone who are unsure what market capitalization is, they are basically the total value of the number of shares the company issued multiplied by the share price the company is trading. As you can see, there are multiple reasons why the market cap (share price) is important to the management – tapping institutional investors, incentives, influence of market intermediaries, management bonus, etc. 

The problem with trying to influence the market share price is it depends a lot on a whole other factors – some systematic like fundamental changes while other unsystematic like macro or black swan events. 

The share price of a company can be decoupled from both weak and strong fundamental performance for instance. By weak earnings or changes to the operational positions, investors might value them at a trading range lower than their historical because it is now more riskier than the norm. Even when earnings or fundamentals are getting stronger, there will be a cycle of misevaluation attached to it. For instance, Osim or Super Group. This starts when the company captures the attention of the strong institutional investors or other capital markets, snowballed the effect to other smaller brokers and retail investors and as a result the price gets pushed up higher and higher to become overvalued. In the premium building process, the management will have pressure managing the share price and expectations of the market and might do things that will meet the short term performance, which can be detrimental to their long term success. 

The long term costs of focusing on the wrong thing is detrimental to the shareholders who suffer direct losses from owning part of the shares of the company. In the correction process, shareholders usually gets punished severely as they see their company shares dived down to the point of no return, usually. It takes an elevator to rise slowly but dived down by jumping. 

In this regard, we can perhaps attribute maximizing shareholders’ value as achieving the fair market value for the company. By fair value, I mean achieving a market capitalization that accurately reflects its sustainable underlying performance of the company. It implies a very different objective from the management as they have to manage the expectation of the market and ensuring the market does not overly placed a premium on their valuation. 

I guess when that happens, long term investors get what they deservedly get by staying vested with companies such as Vicom and Boustead where shareholders are rewarded handsomely over a period of time.


  1. good one.i guess there are still much folks linked to maximising share prices.

    1. Maximizing share price should be part of overall maximizing shareholders value too i guess.

  2. very long sentences and many big words. lol had to read twice to understand the gist. no offence. :)

  3. B, you are absolutely right!

    I, myself, is guilty of trying to time the market to maximize my investment dollars, and still got caught in correction. However, I wouldn't call my buys as mistakes. I first bought WMT at $78 after coming down >10%. Then the stock steadily diving to $50s. I kept buying and now averaging at $68 almost breaking even from the paper loss perspective, however, with dividend payout, I'm making a little profit or breaking even.

    Even when we see a market "correction" or stock breaking all time high record, there is a stock that is correcting somewhere. That was what value investor or that's what separate investors.

    The DOW is only down <10%, BAC is down to $11 from the high of ~$19. It loss almost 50% of value. The bank is still making money, the market can behave irrationally, so I still think it's better to be a value investor, picking the ones that are being punished for no good reason.

    Of course, when you look at the chart of the stock over the period of time, the direction it goes is UP, WHY PEOPLE ARE STILL LOSING MONEY? :P Everybody is buying and selling at the wrong time. LOL :)

    1. Hi Vivianne

      I saw a couple of your buy and sell recently and they are all very well thought of. I guess you know what you are looking out for and whether the management has your interest as minority shareholders.

  4. B, you brought up a great point "whether the management has your interest as minority shareholders". One of the reason to pick a company and one of the criteria is how much inside trading and holding, like Google would split but it divide into A class and C class so the original wouldn't lose voting right or "ownership". That way they'd care more about the company and the direction of the company as they are the direct beneficiary.

    I can't deny that big banks is a huge problem now because the shares are so diluted that insider ownership is low to nonexistence. That's why I'm reading your blog right? hehe you educate us on different metrics to see "value" in a company.

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