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Managerial Theories of Firms.pptx Me

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  Managerial theories of firms  The managerial theories separate ownership from management, the owners are the shareholders, whose power lies in appointing the board of directors, which in turn appoints top management.   Owners shareholders Board of directors Top Management   The managers discretion in defining the goals of the firm is limited by the need to produce a minimum level of profit necessary to satisfy the shareholders.  The basic feature of all managerial theories is that the manager maximize their own utility, subject to a minimum profit constraint necessary for the job security agent problem  To deal with the principal agent problem(i.e., different goals of manager and owners), firms often give managers a financial stake in the success of the firm so that they pursue objectives that are close to profit maximization.  Many corporations have adopted employee stock option plan(ESOPs) under which managers can purchase shares of common stock at less than market price.   These plan give managers an incentive to promote profits of the firm and to act in harmony with the interests of the owners.  One recent study shows that if managers own between 5 and 20 per cent of a firm, the firm is likely to perform better in terms of profitability, than they own less than 5 per cent.  In the USA, there are approximately 10,000 ESOPs with 10 million employee owners(ESOP Association, USA).   Wipro and Infosys, the two largest listed IT Stock in India, were amongst the first companies to institute ESOPs.  Baumol's Theory of Sales Revenue Maximisation    Baumol has postulated maximization of sales revenue as an alternative to profit maximization objective.   According to him oligopolistic firm aim at maximizing the sales revenue.   According to the sales-maximization model introduced by William Baumol and others, managers of modern corporations seek to maximize sales after an adequate rate of profit has been earned to satisfy stockholders.  Baumol argued that a larger firm may feel more secure, may be able to get better deals in the purchase of inputs and lower rates in borrowing money, and may have a better image with consumers, employees, and suppliers.  Indeed, some early empirical studies found a strong correlation between executives’ salaries and sales, but not between salaries and profits. More recent studies, however, found the opposite.

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Jul 23, 2017

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Jul 23, 2017
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