In accounting wealth maximization can be defined as a concept of maximizing the value of business. With the help of wealth maximization a business can increase the value of shares of the business that are held by the share holders. The concept of wealth maximization urges business to find out ways and operations that results in highest possible return on the invested fund along with minimizing the risk of loss while doing so. In order to so the management analysis the cash flow associated with every investment made by the investors or share holders.
The implementation of wealth maximization approach in a company becomes very obvious with the change in the share price of the company. For example if a company spends some cash in developing new and valuable opportunities the investors will invest in the company as they are going to recognize the future positive cash flows within the business. This activity of the investor will result in an increase in the share price of the company as investor will bid high for the shares.
In certain cases the concept of the wealth maximization is also criticized as a company may cross limits in implementing wealth maximization techniques that are no favorable for the other stakeholders of the company such as employees, suppliers and the surrounded communities. For example in order to minimize wealth a company may put little investment in safety equipment that will result in putting the employees and workers at risk. Similarly it may put little investment in pollution control equipment that results in the environmental disaster of the surrounding communities.
Other Related Accounting Articles: