managerial theories of the firm

managerial theories of the firm

the THEORIES OF THE FIRM that substitute firm objectives such as SALES-REVENUE MAXIMIZATION and ASSET GROWTH MAXIMIZATION for the traditional hypothesis of PROFIT MAXIMIZATION. These theories are based on two assumptions:
  1. that for large oligopolistic firms there is a DIVORCE OF OWNERSHIP FROM CONTROL that allows the firm's management to set the firm's objectives rather than its shareholders;
  2. managers are more interested in sales and assets goals than profit maximization because the size of their salaries and their power and status (managerial utility) are chiefly linked to the size of the firm. Profits are still important but they are seen as contributory to the attainment of some other objective rather than as an end in themselves.

The significance of the managerial theories as an extension of the THEORY OF THE FIRM lies in their prediction of higher output levels and lower prices in comparison with the profit-maximizing theory. See MANAGEMENT-UTILITY MAXIMIZATION, BEHAVIOURAL THEORY OF THE FIRM, SATISFICING THEORY, PRINCIPAL-AGENT THEORY, FIRM OBJECTIVES.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005