1. 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.”

2. 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.

3. 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.

4. Sales revenue maximising with a profit constraintTC TR P O Q Q2 Q3 Q1
Total profit

5. 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 3

6. 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 4

7. Agency Theory
Agency theory in its simplest form discusses the relationship between two (or more) people, a principal and an agent who makes decisions on behalf of the principal.
Owners of firms and their managers.
Patient-doctor.
Managers and their subordinates.

8. Agency Theory
All agency relationships involve moral hazard.
“the principal and the agent may have different objectives and the principal cannot easily determine whether the agent’s reports and actions are being taken in pursuit of the principal’s goals or self-interested behaviour.”

9. Agency Theory
Informational Asymmetry
Monitoring
The Free Rider Problem

10. External Constraints on Managers
The Product Market
The Market for Corporate Control
The Market for Managerial Labour

11. Internal Control Mechanisms
Performance Related Pay
concentrates the risk of agents
promotes short term profit
share options schemes are asymmetric
compensation committees
size does matter

12. Additional Control Mechanisms
The Board of Directors
Multiple Principals - the Role of the Banks
Managerial Bonding: the Role of Debt