Shareholder theory, stakeholder theory, and the capital budgeting decision

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Abstract

This paper constructs a capital budgeting framework within which shareholder theory and stakeholder theory are complements, not substitutes. Shareholder theory focuses managerial attention on a single goal: the maximization of a firm’s long-term value. Stakeholder theory identifies the necessary prerequisites for long-term value maximization. In particular, to create long-term value for shareholders, a firm must first create value for current and future customers and employees, and it must not do so at the expense of the broader community, or society as a whole. The new model is unique in that encourages managers making capital budgeting decisions to explicitly consider tail risks, defined as events that, while unlikely, could have a significant impact on a firm’s operations and valuation. Within this framework, the net present value (NPV) rule provides an objective decision rule to constrain managerial discretion and to balance the interests of competing stakeholders in the project selection process.

Keywords: Shareholder Theory, Stakeholder Theory, Capital Budgeting, NPV, Risk Management

Authors’ individual contribution: Conceptualization — M.G.D., K.M.H., and G.T.O.; Methodology — M.G.D., K.M.H., and G.T.O.; Writing — M.G.D., K.M.H., and G.T.O.; Project Administration — M.G.D., K.M.H., and G.T.O.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G30, G32, M14

Received: 11.02.2024
Accepted: 18.04.2024
Published online: 22.04.2024

How to cite this paper: Danielson, M. G., Hogan, K. M., & Olson, G. T. (2024). Shareholder theory, stakeholder theory, and the capital budgeting decision. Corporate Ownership & Control, 21(2), 37–44. https://doi.org/10.22495/cocv21i2art3