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Rev Fin 1990; 3:367-391
© 1990 the Society for Financial Studies

Article

Shareholder-value maximization and product-market competition

JJ Rotenberg and DS Scharfstein
Massachusetts Institute of Technology, Cambridge, MA 02139, USA

Abstract

We investigate product-market competition when managers maximize shareholder value rather than their expected discounted value of profits. If share-holders are imperfectly informed about future profitability, shareholder-value maximization can lead to either more or less aggressive product-market strategies. Lower rivals' profits lead investors to believe that the firm's costs are low relative to those of its rivals and that the industry's prospects are poor. If the former (latter) inference dominates, each firm tries to lower (raise) its rival's profits to increase its own stock price. We also consider implications for corporate financial structure.


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