Part 1 theoretical foundations - theories of the firm - managerial theories of the firm Flashcards
What are the main managerial theories of the firm?
1\ Baumol’s theory of sales revenue maximization
2\ Marris
3\ Williamson
What is the beginning concept of managerial theories?
That managers’ objectives may differ from those of the shareholders.
Moreover, the neoclassical theory is not realistic enough.
What are the 2 main starting points of the development of managerial theories?
1\ Increasing organisational complexity
2\ Ownership becoming widely dispersed & nature of share ownership also changed –> control of firm became increasingly diluted
What are the 3 reasons pushing a manager to pursue a sales revenu maximisation? (Baumol)
1\ sales = organisational performance
2\ executive remuneration are based on sales’ performance
3\ poor sales = difficulties to raise finance from capital markets
What is the objective of Baumol’s theory of sales revenue maximisation?
Satisfy a minimum profit constraint (raise finance + shareholders trust)
What does the manager need to choose between in Baumol’s theory of the firm?
Current sales revenue or future growth sales revenue
What is the theory of Marris?
Growth maximization
Which balance does the theory asks to trieve for?
A balance between the rate of growth of products’ demand and the rate of growth of the firm’s capital
How do we achieve growth of rate demand in the short run?
1\ price adjustments
2\ marketing campaigns
3\ changes in product design
How do we reach growth in the long run?
Diversification
How does a company finance growth of capital?
1\ borrowing
2\ issuing new share capital
3\ use of retained profits
What is the problem in borrowing?
1\ Balance sheet debit too heavy
2\ risks for lenders and shareholders
2\ a\ insufficient earnings
2\ b\ volatile earnings due to fixed charge on earnings
What is the risk in retaining dividends?
Being dismissed
What is the answer of Marris?
Using the valuation ratio
What is the valuation ratio?
the ratio of the firm’s stock market value to the book value of its assets
What does this technique do?
Create a want for the firm that could be taken over
What is the trade-off anyways?
Trade-off between current profitability and growth
What is Williamson’s theory?
Managerial utility maximization
What does take part in the utility function of Williamson?
1\ Expenditures on staff
2\ Expenditure on emoluments
3\ Discretionary profit
What does it mean if the discretionary profit is high?
The job security of the manager is high
What is the difference between discretionary profit and operating profit?
1\ After taxes and expenditures
3\ Before expenditures
What is the conclusion of Williamson on a managerial firm?
It spends more on staff than a profit maximization firm
