2. If the evidence suggests anything, it is that markets do not value current earnings and
cash flows enough and value future earnings and cash flows too much. Studies
indicate that stocks with low price-earnings ratios, i.e., high current earnings, have
generally been under priced relative to stocks with high price-earnings ratios.
3. The market response to research and development and investment expenditure is not
uniformly negative, as the 'short term' critics would lead you to believe. Instead, the
response is tempered, with stock prices, on average, rising on the announcement of
R&D and capital expenditures.
Do some investors and analysts focus on short term earnings and not on long term
value? Of course. In our view, financial managers cater far too much to these investors
and skew their decisions to meet their approval, fleeting though it might be.
The Firm and Society
Most management decisions have social consequences, and the question of how
best to deal with these consequences is not easily answered. An objective of maximizing
firm or stockholder wealth implicitly assumes that the social side-costs are either trivial
enough that they can be ignored or that they can be priced and charged to the firm. In
many cases, neither of these assumptions is justifiable.
There are some cases where the social costs are considerable but cannot be traced
to the firm. In these cases, the decision-makers, though aware of the costs, may choose to
ignore the costs and maximize firm wealth. The ethical and moral dilemmas of forcing a
managers to choose between their survival (which may require stockholder wealth
maximization) and the broader interests of society can be debated but there is no simple
solution that can be offered in this book.
In the cases where substantial social costs exist, and firms are aware of these
costs, ethicists might argue that wealth maximization has to be sublimated to the broader
interests of society, but what about those cases where firms create substantial social costs
without being aware of these costs? John Manville Corporation, for instance, in the fifties
and sixties produced asbestos with the intention of making a profit, and was unaware of
the potential of the product to cause cancer. Thirty years later, the lawsuits from those
afflicted with asbestos-related cancers have driven the company to bankruptcy.