Of course, management still has the difficult task of estimating the impact of its deci-sion on the value of the firm's shares. Thus, in our preceding illustrations, in order tochoose between projects A and B, or between A and C, management would have to deter-mine which of them is likely to increase the value of the firm the most. This is not easy, butthe criterion for making the decision is unambiguous.
Thus, the goal of management is to make decisions so as to maximize the firm's valueto its shareholders. The main challenge in implementing this criterion is to obtain informa-tion about the likely impact of its decisions on the firm's value. Management's task is mademuch easier when it can observe market prices of its own and other firms' shares.
Indeed, in the absence of such market price information, it is difficult to see how theycan implement this criterion at all. Although it is reasonable to assume that good managerswill have as much information about their firm's production technology as anyone, suchinternal (to the firm) information is not sufficient to make effective decisions. In theabsence of a stock market, managers would require external (to the firm) information that iscostly if not impossible to obtain: namely, the wealth, preferences, and other investmentopportunities of the owners.
Thus, the existence of a stock market allows the manager to substitute one set of exter-nal information that is relatively easy to obtain--namely, stock prices--for another set thatis virtually impossible to obtain--information about the shareholders' wealth, preferences,and other investment opportunities. The existence of a well-functioning stock market,therefore, facilitates the efficient separation of the ownership and management of firms.
Note that in one respect the corporation's own senior managers and outside stock ana-lysts who follow the corporation face a common task. Both groups are concerned withanswering the question: How will the actions taken by management affect the market priceof the firm's shares? The big difference is that the managers are the ones who actually makethe decisions and have responsibility for implementing them.
One place to look for a statement of the goals of a corporation's top managers is theannual report to shareholders. Often the opening letter from the company's chief executiveofficer states what management's financial goals are and the general strategic plan forachieving them (see Box 1.6).
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