This degree of freedom inherent in the use of the fictional undiversified shareholder concept totally undercuts the ability of the shareholder wealth maximization norm to constrain directors to favor the interests of shareholders over their own personal interests and those of senior officers or other corporation stakeholders.
The fictional corporation-specific diversified shareholder concept also has the advantage of relative ease of application.
Turning to the remaining two candidates, the contest is close but I believe that the fictional diversified shareholder concept is to be slightly preferred over the fictional equity-only diversified shareholder concept.
The fictional diversified shareholder concept has one clear advantage over the fictional equity-only shareholder concept in that it is not subject to the vicinity of insolvency problem of potentially endorsing inefficient investments.
In addition, this concept does not have any significant offsetting disadvantages relative to the fictional equity-only diversified shareholder concept.
It thus defeats the whole purpose of using a fictional shareholder concept to facilitate those decisions, and thus also is inferior to the use of the fictional diversified shareholder concept.
In that analysis Hu began by recognizing the significant advantages for directors of utilizing a fictional shareholder concept to make their investment decisions, as compared to the difficulties of having to assess and balance actual shareholder preferences.
59) He argued, as do I, that use of the fictional undiversified shareholder concept will lead directors to be too sensitive to the unsystematic risks associated with investment choices, relative to actual diversified shareholder preferences.
Hu's 1990 article reaches the same broad conclusion as I have, that the fictional diversified shareholder concept is to be preferred over the fictional undiversified shareholder concept as a means of implementing the shareholder wealth maximization norm.
69) The first concept, which corresponds to my fictional undiversified shareholder concept discussed in Part B.
In this latter article, Hu focuses primarily on the significance of the proliferation of new financial products, such as multiple classes of equity-like claims and new hedging instruments for the determination of whether the fictional undiversified shareholder concept or the fictional diversified shareholder concept provides the more appropriate framework for corporate investment decisions.
In the face of these new complexities, Hu essentially retracts his earlier qualified endorsement of the fictional diversified shareholder concept.