The Role of Shareholder Primacy in Institutional Choice

39 Pages Posted: 5 May 2005

See all articles by Jill E. Fisch

Jill E. Fisch

University of Pennsylvania Carey Law School; European Corporate Governance Institute (ECGI)

Date Written: October 2004

Abstract

An extensive body of empirical research evaluates corporate law in terms of its effect on shareholder wealth and, based on this effect, makes efficiency claims designed to influence regulatory policy. Central to these claims is the premise that the principal objective of the corporation is the maximization of shareholder wealth. By defining regulatory efficiency in terms of shareholder wealth, the literature relies on the shareholder primacy norm to equate shareholder value with firm value.

This Article challenges both the positive and the normative foundations of the shareholder primacy norm. The Article demonstrates that existing legal doctrine does not require corporations to maximize shareholder wealth at the expense of other stakeholder interests. Although economic analysis offers a theoretical defense of shareholder primacy, its conclusions are based on strong and questionable assumptions about the market conditions in which the corporation operates. Finally, the Article explores and rejects the argument that shareholder primacy may be grounded in existing limits on management fiduciary duties, offering an alternative defense of those limits in terms of comparative institutional analysis.

Justifying the evaluation of corporate performance in terms of shareholder wealth is critical to empirical claims of regulatory efficiency. The presence of other stakeholders, whose interests in the firm may be not reflected in an assessment of shareholder value, raises questions about efficiency analyses that do not incorporate those interests into their assessment of firm value. Alternative conceptions of firm value suggest that empirical scholars need to offer better and explicit justifications for their reliance on shareholder wealth and, more importantly, for their argument that shareholder wealth effects should dominate regulatory policy.

Suggested Citation

Fisch, Jill E., The Role of Shareholder Primacy in Institutional Choice (October 2004). Available at SSRN: https://ssrn.com/abstract=704745 or http://dx.doi.org/10.2139/ssrn.704745

Jill E. Fisch (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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