The Principal-Agent Problem
• Ownership & control: “the large
corporation is owned by so many
shareholders that no single shareholder
owns a significant proportion of the outside
stock. Therefore no single shareholder has
the power to really control the actions of
the officers of the corporation”.
• “Negligence and profusion … must always
prevail in such a company.”
The Principal-Agent Problem
• The bulk of the dividends go to outside
shareholders.
• All the major decisions are taken by the
corporate officers.
• The outside shareholders are unable to
control the corporate officers.
• The interests of the shareholders and the
corporate officers diverge significantly.
The Principal-Agent Problem
• Shareholders: PROFIT
• Corporate Officers: POWER, PRESTIGE,
PERSONAL WEALTH
• Senior managers may be in a position to
enrich themselves at the expense of the
shareholders.
Sales revenue maximising with a profit constraint
£
TC
TR
P
O
Q
Q2
Q3 Q1
Total profit
ALTERNATIVE MAXIMISING THEORIES
• Sales revenue maximisation
– equilibrium output and price
– comparison with profit-maximising output and
price
– effect of a minimum profit constraint
– implications for advertising
– comparisons with short-run profit maximising
– implications for the consumer
– assessment of the theory
ALTERNATIVE MAXIMISING THEORIES
• Growth as a motive for firms
– growth maximisation
– means of achieving growth
• Growth by internal expansion
– sources of funds
– the takeover constraint
• Growth by merger and take over
– types of merger
– merger activity