My first conclusion is that two of these characterizations--the fictional undiversified shareholder concept and the fictional corporation-specific diversified shareholder concept--should each be discarded as unacceptable alternatives.
The fictional undiversified shareholder concept, while it is the currently prevailing approach and is by far the easiest of the approaches to apply, should nevertheless be discarded for two reasons.
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.
The fictional diversified shareholder concept, in my opinion, ultimately wins this contest because it better addresses the vicinity of insolvency inefficient investment incentives problem.
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.
Hu strongly endorsed the use of the fictional diversified shareholder concept, with some qualifications, (58) primarily on the basis that its underlying assumptions about the broad extent of shareholder diversification are more realistic than the assumptions underlying the fictional undiversified shareholder concept.
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.1, is formally labeled the "classic entity-oriented model." (70) The second and third concepts are again labeled the "pure shareholder wealth maximization model" and the "blissful shareholder wealth maximization model," and are defined in the same manner as in his earlier article.
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.