The 2007 global financial crisis ignited by reckless bankers and their flawed reward structures will be felt for years to come. Emerging from the wreckage, however, is renewed support for the over-arching objective of traditional finance theory, namely the long-run maximisation of shareholder wealth using the current market value of ordinary shares (common stock) as a benchmark.
If capitalism is to survive, it is now widely agreed that conflicting managerial aims and short-term incentives, which now seem to characterise every business sector, must become entirely subordinate to the preservation of ownership wealth, future income and capital gains.
And as we shall discover, the key to resolving this principle-agency problem begins with a theoretical critique of how shares are valued. This not only underpins the practical measures of current and historical stock market performance published in the financial press (price, yield, cover, and the P/E ratio) used by market participants throughout the world. It also provides private individuals and the companies or financial institutions acting on their behalf with a common framework to analyse all their future investment decisions, whether it is an individual share transaction, a market placement, or corporate takeover activity.