Discussion on Corporate Financial Management Objective Based on Maximization of Corporate Value

ZHANG Weimei

School of Economics and Management, Hunan City University, Yiyang City, Hunan Province,

China, 413000 zhweimei@yahoo.com.cn

Keywords: Corporate value; Financial management; Objectiveness; Stockholder

Abstract. Corporate value is one of the nuclear of the concepts of corporate finance. The object of corporate finance management is to maximum corporate value. In order to fulfill the financial management target of “maximization of corporate value”, firstly, we should establish a team that fits with development of modern enterprises based on human-orientation. Secondly, we should optimize allocation of resources and make good use of funds. Thirdly, we should set up internal control mechanism and strengthen financial supervision. Finally, we should set up risk predict and evaluation system and strengthen the ability to resist risks.

Introduction

As the core of corporate management, financial management has to be consistent with the target of an enterprise in terms of its target. In China, the public-owned economy occupies a leading position. As part of the economic sector under ownership by the whole people, state-owned enterprises have the target to add to the wealth of the whole society. Both economic profit and social benefit should be pursued. At the time of developing the enterprises, the enterprises should also take into account influences upon the social stability and development. Therefore, it seems extremely important to select a corporate financial management target that suits with the national condition of China.

Connotation of the maximization of corporate value

Great differences exist between accounting and economics in their understanding of “value”. Usually, accounting personnel show preference to employ actual cost or historical cost to measure the value of an article, while economic academics prefer to employ the market value or alternative cost of an article to measure its value. According to the requirement of objectiveness, it is relatively in accordance with the requirement of financial target to select the market value of an enterprise. Profit in accounting is manifested as margin between income and expense, while profit in economics was at the earliest defined by Adam Smith as “increase of wealth”. That is to say, the target of maximization of value added is equal to the target of maximization of corporate wealth. In this case, maximization of corporate value refers to maximization of “economic profit” of the enterprises, but not “maximization of profit” in accounting. The target of maximization of corporate value equals to the target of maximization of corporate wealth in the theoretical field in western countries which has been mentioned above^[1]. It means that an enterprise makes the best financial decision through rational operation in the operation of the enterprise. An enterprise has to take full consideration of the time value of capital and relationship between risk and reward and enable the

total value of the enterprise to be maximum on the basis of guaranteeing long term and stable development of the enterprise.

The important significance in regarding “maximization of corporate value” as the financial target

Maximization of corporate value corresponds with interests of all stakeholders related. From the perspective of a stockholder, with fulfillment of the target of maximization of corporate value and strengthened ability of an enterprise to make the profit, the stockholder may gain more and more profits through the physical capital that has been invested. From the perspective of a creditor, with the target of maximization of corporate value is fulfilled and inflow of cash, the ability of an enterprise to service debt is intensified and the enterprise is able to finish the payoff to the creditor at full amount in time and guarantee interest of the creditor^[2]. From the perspective of the operator and employees, the corporate value is added, which reflects realization of the human capital value invested by the operator and the employees and increase of reward in human capital, subsequent reduction of the risk of layoff and re-employment cost among the operator and the employees and possible improvement in terms of promotion, training and working environment for the operator and the employees. From the perspective of the government, with fulfillment of the target of maximization of corporate value and inflow of cash, the enterprises have sufficient payment ability to pay all sorts of taxes at full amount in time and have the ability to burden all kinds of political responsibilities. From the perspective of the client, only maximization of the corporate value is able to satisfy his corresponding interest need, such as offer of high-quality products, improvement of corporate credit and development of new products, etc. From the perspective of the society, only maximization of the corporate value can enable the enterprises to have the ability to pay for expenses in social responsibilities and to burden all kinds of social responsibilities^[3], such as a variety of public welfare establishments, investment in environmental protection, resource conservation and development of the community, etc. The target of maximization of the corporate value is helpful for fulfillment of interest of all stakeholders and fundamentally guarantees relevant interest of stakeholders.

The target of maximization of corporate value is helpful for long term development of enterprises and social progress. Only if an enterprise sets foot in the future, continuously proceeds with independent innovation and enhance th

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Discussion on Corporate Financial Management Objective Based on Maximization of Corporate Value

ZHANG Weimei

School of Economics and Management, Hunan City University, Yiyang City, Hunan Province,

China, 413000 zhweimei@yahoo.com.cn

Keywords: Corporate value; Financial management; Objectiveness; Stockholder

Abstract. Corporate value is one of the nuclear of the concepts of corporate finance. The object of corporate finance management is to maximum corporate value. In order to fulfill the financial management target of “maximization of corporate value”, firstly, we should establish a team that fits with development of modern enterprises based on human-orientation. Secondly, we should optimize allocation of resources and make good use of funds. Thirdly, we should set up internal control mechanism and strengthen financial supervision. Finally, we should set up risk predict and evaluation system and strengthen the ability to resist risks.

1.Introduction

As the core of corporate management, financial management has to be consistent with the target of an enterprise in terms of its target. In China, the public-owned economy occupies a leading position. As part of the economic sector under ownership by the whole people, state-owned enterprises have the target to add to the wealth of the whole society. Both economic profit and social benefit should be pursued. At the time of developing the enterprises, the enterprises should also take into account influences upon the social stability and development. Therefore, it seems extremely important to select a corporate financial management target that suits with the national condition of China.

2.Connotation of the maximization of corporate value

Great differences exist between accounting and economics in their understanding of “value”. Usually, accounting personnel show preference to employ actual cost or historical cost to measure the value of an article, while economic academics prefer to employ the market value or alternative cost of an article to measure its value. According to the requirement of objectiveness, it is relatively in accordance with the requirement of financial target to select the market value of an enterprise. Profit in accounting is manifested as margin between income and expense, while profit in economics was at the earliest defined by Adam Smith as “increase of wealth”. That is to say, the target of maximization of value added is equal to the target of maximization of corporate wealth. In this case, maximization of corporate value refers to maximization of “economic profit” of the enterprises, but not “maximization of profit” in accounting. The target of maximization of corporate value equals to the target of maximization of corporate wealth in the theoretical field in western countries which has been mentioned above[1]. It means that an enterprise makes the best financial decision through rational operation in the operation of the enterprise. An enterprise has to take full consideration of the time value of capital and relationship between risk and reward and enable the total value of the enterprise to be maximum on the basis of guaranteeing long term and stable development of the enterprise.

3.The important significance in regarding “maximization of corporate value” as the financial target

Maximization of corporate value corresponds with interests of all stakeholders related. From the perspective of a stockholder, with fulfillment of the target of maximization of corporate value and strengthened ability of an enterprise to make the profit, the stockholder may gain more and more profits through the physical capital that has been invested. From the perspective of a creditor, with the target of maximization of corporate value is fulfilled and inflow of cash, the ability of an enterprise to service debt is intensified and the enterprise is able to finish the payoff to the creditor at full amount in time and guarantee interest of the creditor[2]. From the perspective of the operator and employees, the corporate value is added, which reflects realization of the human capital value invested by the operator and the employees and increase of reward in human capital, subsequent reduction of the risk of layoff and re-employment cost among the operator and the employees and possible improvement in terms of promotion, training and working environment for the operator and the employees. From the perspective of the government, with fulfillment of the target of maximization of corporate value and inflow of cash, the enterprises have sufficient payment ability to pay all sorts of taxes at full amount in time and have the ability to burden all kinds of political responsibilities. From the perspective of the client, only maximization of the corporate value is able to satisfy his corresponding interest need, such as offer of high-quality products, improvement of corporate credit and development of new products, etc. From the perspective of the society, only maximization of the corporate value can enable the enterprises to have the ability to pay for expenses in social responsibilities and to burden all kinds of social responsibilities[3], such as a variety of public welfare establishments, investment in environmental protection, resource conservation and development of the community, etc. The target of maximization of the corporate value is helpful for fulfillment of interest of all stakeholders and fundamentally guarantees relevant interest of stakeholders.

The target of maximization of corporate value is helpful for long term development of enterprises and social progress. Only if an enterprise sets foot in the future, continuously proceeds with independent innovation and enhance the scientific and technical level, is it possible to continuously add to the anticipated value of t

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