Part 1 theoretical foundations - theories of the firm - managerial theories of the firm

Question 1

What are the main managerial theories of the firm?

Answer 1

1\ Baumol’s theory of sales revenue maximization
2\ Marris
3\ Williamson

Question 2

What is the beginning concept of managerial theories?

Answer 2

That managers’ objectives may differ from those of the shareholders.
Moreover, the neoclassical theory is not realistic enough.

Question 3

What are the 2 main starting points of the development of managerial theories?

Answer 3

1\ Increasing organisational complexity
2\ Ownership becoming widely dispersed & nature of share ownership also changed –> control of firm became increasingly diluted

Question 4

What are the 3 reasons pushing a manager to pursue a sales revenu maximisation? (Baumol)

Answer 4

1\ sales = organisational performance
2\ executive remuneration are based on sales’ performance
3\ poor sales = difficulties to raise finance from capital markets

Question 5

What is the objective of Baumol’s theory of sales revenue maximisation?

Answer 5

Satisfy a minimum profit constraint (raise finance + shareholders trust)

Question 6

What does the manager need to choose between in Baumol’s theory of the firm?

Answer 6

Current sales revenue or future growth sales revenue

Question 7

What is the theory of Marris?

Answer 7

Growth maximization

Question 8

Which balance does the theory asks to trieve for?

Answer 8

A balance between the rate of growth of products’ demand and the rate of growth of the firm’s capital

Question 9

How do we achieve growth of rate demand in the short run?

Answer 9

1\ price adjustments
2\ marketing campaigns
3\ changes in product design

Question 10

How do we reach growth in the long run?

Answer 10

Diversification

Question 11

How does a company finance growth of capital?

Answer 11

1\ borrowing
2\ issuing new share capital
3\ use of retained profits

Question 12

What is the problem in borrowing?

Answer 12

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

Question 13

What is the risk in retaining dividends?

Answer 13

Being dismissed

Question 14

What is the answer of Marris?

Answer 14

Using the valuation ratio

Question 15

What is the valuation ratio?

Answer 15

the ratio of the firm’s stock market value to the book value of its assets

Question 16

What does this technique do?

Answer 16

Create a want for the firm that could be taken over

Question 17

What is the trade-off anyways?

Answer 17

Trade-off between current profitability and growth

Question 18

What is Williamson’s theory?

Answer 18

Managerial utility maximization

Question 19

What does take part in the utility function of Williamson?

Answer 19

1\ Expenditures on staff
2\ Expenditure on emoluments
3\ Discretionary profit

Question 20

What does it mean if the discretionary profit is high?

Answer 20

The job security of the manager is high

Question 21

What is the difference between discretionary profit and operating profit?

Answer 21

1\ After taxes and expenditures

3\ Before expenditures

Question 22

What is the conclusion of Williamson on a managerial firm?

Answer 22

It spends more on staff than a profit maximization firm