2 ms·

share holders longer term don't have to be rich

• earthboundkid 7y ago
  I agree, but the theory "firms exist to maximize shareholder value" ensures that they will be. Put it this way: gravity turns space dust into supernovas. Dust is just ever so slightly attracted to other dust, so it accumulates and accumulates, and eventually it becomes so massive that it forms a star. The theory that firms should beat the market makes money gravitational. A shareholder who beats the market will get more money than other shareholders. Now they have more money that they can use to invest in other market beating schemes, etc. If whether a firm beats the market is random, then some investors will win and some will lose but it all balances out. But if beating the market is not random (and how could it be totally random?) then those with the most money can invest in the best firms faster and more easily than smaller investors and crowd them out. Remember that companies only have a finite number of shares, so not everyone can invest in a winner. If there's even a slight bias towards having more money making it easier to beat the market, then eventually you will get a supernova. We all understand this on some level. Why is insider trading illegal? Because it makes it trivial to beat the market!