There are few debates exist on the rational financial decisions and the shareholders wealth maximization. Initially, you may review few basic theories such as : Durand's Net Income Approach, Net Operating Income Approach, Modigliani-Miller Approach and Traditional Approach and then you can see articles relating to it.

Following Link and papers will be helpful;

https://hbr.org/2006/09/ten-ways-to-create-shareholder-value

All of the above are rational answers to your question but will not really address the underlying issue I see which is your question itself.

The issues are 1/ "wealth", 2/ whether you can continually maximise it, 3/ what is rational and 4/ "optimal capital structure".

1/ There are good books on wealth by Beinhocker, Santa Fe etc but what is wealth? It also demands a time consideration so therefore are you discussing price/value over rational financial decisions compared to eventual outcomes?

2/ Is it wise to always maximise or should the strategy be to target an optimal outcome and achieve it? Maximisation involves increased risk that outcomes do not materialise.

3/ In today's multi-investor world the size of investments need must necessarily involve investors with competing objectives so what would be rational for one may not be for another, besides reflect on what you mean by rational, is it "logical process" or a reference to accepted frameworks?

4/ This infers you are looking at regulated industries which opens a completely different problem that is well articulated in the financial press. If you infer gambling via non-regulated instruments with all its risks then that is equally available from the G-20 and FT etc, otherwise you are always putting your capital at risk with equity/debt it's just the price at the time that needs to be assessed.

Remember price and value are not the same and governance, variety and time are variables that need attention.

The principal of maximization of shareholder wealth provides a rational guide for running a business and for the efficient allocation of resources in a society; we use it as our assumed objective in considering how financial decisions should be made. The purpose of capital markets is to efficiently allocate savings in an economy from ultimate savers to ultimate users of funds who invest. If savings are to be channeled to the most promising investment opportunities, a rational economic criteria must exist that governs their flow. By and large, the allocation of savings in an economy occurs on the basis of expected return and risk. The market value of a firm’s stock embodies both of these factors. It therefore reflects the market’s tradeoff between risk and return. If decisions are made in keeping with the likely effect upon the market value of its stock, a firm will attract capital only when its investment opportunities justify the use of that capital in the overall economy.

In other words, the equilibration process by which savings are allocated in an economy occurs on the basis of expected return and risk.  Holding risk constant, those economic units (business firms, households, financial institutions, or governments) willing to pay the highest yield are the ones entitled to the use of funds.  If rationality prevails, the economic units bidding the highest yields will be the ones with the most promising investment opportunities.  As a result, savings will tend to be allocated to the most efficient users.  Maximization of shareholder wealth then embodies the risk-return tradeoff of the market and is the focal point by which funds should be allocated within and among business firms.  Any other objective is likely to result in the suboptimal allocation of funds and therefore lead to less than optimal level of economic want satisfaction.

Can't agree less with you answer Vijay. I've started 5 businesses all in highly regulated industries and through the 80's -2000's in the City of London. As an underwriter and investor in both the capital markets and insurance I'm deeply suspicious of anyone that constantly takes the highest price at the time. What I want is to know the outcome will be achieved and that the current price is just above the value I put on that outcome - all else is greed.

You cannot hold "risk" constant nor can you ignore changing environmental pressure as they impact the time-scale operating. What is more important organisation and variety is never taken into account in classical economics although Keynes himself said that they are important variables to his own thinking.

Finally, rationality rarely prevails when markets go volatile and illiquid that's why we are designing a new economic theory based on probabilistic not deterministic measures - "equi-finality" is entropy by another name and entropy is chaos in economic terms.

:-)

The value of firms is determined by their ability to generate operating cash flows, not by how financial managers bundle (or unbundle) the cash flows for sale, as debt and equity claims, in the capital market. Joseph Stiglitz composed the most straightforward proof that capital structure is irrelevant under the nirvana assumptions of perfect capital markets.[1]  Suppose that there is some optimal debt/equity mix for a particular firm, but the firm does not choose it. Then anyone can offer the optimal capital structure to the market by buying equal proportions of the firm's securities, then issuing the optimal proportions on personal account. If the market value of the firm were less than it would be under the optimal debt/equity mix, the investor would earn an arbitrage profit because the market would pay the investor more for the optimal mix than she had to pay for the suboptimal mix. Since everyone has an incentive to do the arbitrage, at equilibrium the value of the suboptimal mix will be bid up to the point where, at the margin, arbitrage is unprofitable. Thus, the market value of the firm is the value implied by its optimal capital structure, even when the firm does not choose it!

I would not argue with Mr. Wasilewski, however. When there are serious capital market imperfections, it is quite possible for the firm to bundle claims more efficiently than its investors can. But then, the optimal mix is a long term goal; the observed mix, day to day, will be volatile in response to market shocks.

[1] In "On the Irrelevance of Corporate Financial Policy," American Economic Review (December 1974), pp. 851-866.

Further to my answer above, consider the following apocryphal conversation in a pizza parlor:

Waitress:    How would you like your pizza sliced - into four or eight slices?

Yogi Berra:  I'll have the four - I don't think I could eat eight  slices.

I agree Daniel, but would add from an investors perspective Stiglitz also mentioned that it is not only the gross cash flow that matters but the net to equity providers without whom the business would not be established in the first place.

It is the lack of dividend flow and reinvestment into emerging businesses that has really stymied the capital markets. Private Equity turned into riskless second stage structured finance leaving a void for seed and initial capital.

I found a good book by Gunnar Mynar from 1956 that pre-empted Minsky etc and foretold/lamented what would happen if. It was originally printed in German so did not capture the American mind and certainly not the British, but he was a "free Scandinavian".

This debate needs to be kept going! It's important.

Mr. Stefan - There is a saying that "Economics is the only field in which two people can get a Nobel Prize for saying exactly the opposite thing". Any how, it is your experience. You may be right, when markets go volatile. But, most of the times, "Rationality, Risks & Expected Returns are taken in to account in maximizing share

 holders wealth.

Dear Nabila Nisha

I think the optimal capital structure is very important for firms to show the percentage of debt and equity  of portfolio,  because this picture is very important for bankers and suppliers , and also effect how to get the main goal of firm ( nax. wealth ) , because , this goal , must take the risk , speed of cash flow and size of cash flow , rather than depend on how to max. profit . Finally , find the attached file may be helpful for you,\

Best Regards,