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.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.Negligence and profusion … must always prevail in such a company.

The Principal-Agent Problem The bulk of the dividends go to outside shareholders.The bulk of the dividends go to outside shareholders. All the major decisions are taken by the corporate officers.All the major decisions are taken by the corporate officers. The outside shareholders are unable to control 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 interests of the shareholders and the corporate officers diverge significantly.

The Principal-Agent Problem Shareholders: PROFITShareholders: PROFIT Corporate Officers: POWER, PRESTIGE, PERSONAL WEALTHCorporate Officers: POWER, PRESTIGE, PERSONAL WEALTH Senior managers may be in a position to enrich themselves at the expense of the shareholders.Senior managers may be in a position to enrich themselves at the expense of the shareholders.

£ Q O TC TR Q2Q2 Q1Q1 Q3Q3 Total profit Sales revenue maximising with a profit constraint

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 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 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