Question

. Why is maximizing accounting profits not the same thing as maximizing shareholder value? Give an example of something a company could do that would lead to higher profits this year, but would actually harm shareholder value maximization in the long term

Answer 1

Maximizing accounting profits and maximizing shareholder value are two different things. It like the difference between price and value.

As price is the amount you pay for an item and value is what you derive from that item.

Steps which spikes accounting profit and hurts shareholder value in long term are not appreciated .

One example may be that company increases the unit price though accounting profit will increase this year but later years it might go another rway around for shareholders. Customer might find the cos tog product too high thus revenues of the company are getting hit and shareholder value destroys . So management need to focus more won creating shareholder value than acccounting profit.