However, I fail to see how either the greater availability of hedging instruments or the proliferation of new equity-like claims in corporate capital structures undercuts in any way the arguments in favor of use of the fictional diversified shareholder concept to facilitate shareholder wealth maximization.
Daniel Greenwood's 1996 Southern California Law Review article (78) is without question the definitive discussion of the fictional shareholder concept and its implications for corporate behavior.
Finally, Richard Booth in a The Business Lawyer article published in 1998 (82) compared the merits of the fictional undiversified shareholder concept with the fictional diversified shareholder concept.
Booth goes beyond the earlier work of Hu in showing a clear awareness of the "vicinity of insolvency" inefficient investment incentives problem raised by each of these two fictional shareholder concepts. (86) He also goes beyond Hu's analysis to claim that defining directors' duties as running to fictional diversified shareholders would be "unworkable." (87) However, the major concern that Booth expresses for the feasibility of the use of the fictional diversified shareholder concept is not the extensive data requirements of that approach with regard to industry-wide and economy-wide impacts, but instead the difficulty that directors would have in determining the precise extent and nature of their shareholders' diversification.
It is not entirely clear whether Booth would still favor the fictional undiversified shareholder concept over the fictional diversified shareholder concept in the sort of direct fiction-to-fiction comparison that I have made, although my strong surmise is that he would because of the interesting reasons that he gives for his conclusions.
Booth in his article also offers the interesting and counter-intuitive claim in support of the use of the fictional undiversified shareholder concept that even diversified investors would prefer directors to act as though they owed their fiduciary duties solely to undiversified shareholders.
My preference for the fictional diversified shareholder concept is predicated upon the assumed goal of best facilitating the narrow objective of actual shareholder wealth maximization, and best constraining directors from favoring their own interests and the interests of non-shareholder corporate stakeholders at the expense of the shareholders.
And, more importantly, not only would the investment choice made to maximize shareholder wealth on the basis of the fictional diversified shareholder concept often be different from the choice made on the basis of the fictional undiversified shareholder concept, it would also often be more in accord with the preferences of actual diversified corporation shareholders.
I have concluded by endorsing the fictional diversified shareholder concept as being the optimal fictional characterization for facilitating shareholder wealth maximization, as compared to each of the other alternative generic characterizations, and as compared to a hybrid characterization that assumed the existence of both undiversified and diversified shareholders.
Henry Hu also reached this conclusion as to the superiority of the fictional diversified shareholder concept in his 1990 UCLA Law Review article, (98) although he shortly thereafter retracted that position in his 1991 Texas Law Review article.
This is an absolutely devastating shortcoming of this characterization, (102) and that concept therefore should be discarded and replaced either by the fictional diversified shareholder concept I have recommended in qualified terms or by some other fictional shareholder characterization that also imposes more of a constraint on directors in favor of shareholder interests, or by directors discarding the use of such analytical fictions altogether and instead attempting to assess and balance the preferences of their corporation's actual shareholders.
Third, this analysis indicates that while the use of the fictional diversified shareholder characterization would in theory more closely align director decisions with the interests of actual diversified shareholders than would the use of the fictional undiversified shareholder concept, the major data gathering and analysis requirements implied by the industry-wide or even economy-wide assessments that would be needed to apply this concept with any real precision may simply be so extensive and difficult as to render the concept infeasible for any purpose beyond an approximate application that simply removes the differences in the overall variability of the returns associated with various investment alternatives as a criterion in the decision making process.