C/F/179. Share Price Growth and Corporate Finance

This paper examines the claim whether share price growth is a valid corporate objective, and whether managerial compensation should be linked to such growth. This maxim has been an accepted theory in finance since the 1970's but has recently been revisited. The revision finds that this objective is not a wholesome one, and firms should instead focus on increasing overall corporate value. This is a long term goal, and better than the short termism encapsulated in the original principle. Moreover, it is rooted on a false premise, for SPG is nothing more than an expectation measure, and assuming that markets are efficient, managers cannot expect to exceed the market's expectations. In addition, it finds that SPG leads to an underinvestment, mainly due to the rejection of zero or near zero-NPV projects. Further, IRR and payback are not adequate measure of value of actual returns and than better measures such as EVA could be used.