How do we know if we, as managers, are really creating value for our owners? It is questionable whether anyone has a precise definition of what wealth maximization means to owners, let alone other investors. Is it a dividend stream, future earnings, or some combination of the two that incorporates capital gains? Do we take a decision to retain earnings for reinvestment and go for growth, or do we distribute profit to owners? It is doubtful that the choice we make will satisfy every owner’s expectation.
Of greater concern is that our perception of income may differ from investors’ perceptions not simply because we have access to more detailed data or that we employ different valuation models ...