asset-growth maximization

Asset-growth maximizationclick for a larger image
Fig. 9 Asset-growth maximization. The variation of share valuation ratio against the company growth rate.

asset-growth maximization

a company objective in the THEORY OF THE FIRM that is used as an alternative to the traditional assumption of PROFIT MAXIMIZATION. Salaried managers of large JOINT-STOCK COMPANIES are assumed to seek to maximize the rate of growth of net assets as a means of increasing their salaries, power, etc., subject to maintaining a minimum share value, so as to avoid the company being taken over with the possible loss of jobs. In Fig. 9, the rate of growth of assets is shown on the horizontal axis, and the ratio of the market value of company shares to the book value of company net assets (the share-valuation ratio) on the vertical axis. The valuation curve rises at first, as increasing asset growth increases share value but beyond growth rate (G) excessive retention of profits to finance growth will reduce dividend payments to shareholders and depress share values. Managers will tend to choose the fastest growth rate (G*), which does not depress the share valuation below the level (V1) at which the company risks being taken over. See also MANAGERIAL THEORIES OF THE FIRM, FIRM OBJECTIVES, DIVORCE OF OWNERSHIP FROM CONTROL, PRINCIPAL-AGENT THEORY.