objectives of firms

• Reasons for divorce of ownership from control

  • Ownership Structure: Ownership is dispersed among numerous shareholders, often institutional investors, making it challenging for individual owners to control managerial decisions
  • Corporate Governance: Separation of ownership and control is a feature of corporate governance structures, with decision-making authority vested in executive directors and managers rather than individual owners
  • Managerial Objectives: Managers may prioritize personal objectives over shareholder wealth maximization, leading to misalignment of interests between owners and managers
  • Information Asymmetry: Managers possess more information about the company's operations than shareholders, making it difficult for shareholders to assess whether managerial decisions align with their best interests
• Consequences of divorce of ownership from control

  • Principal-Agent Problem: Managers may pursue their own agenda, diverging from shareholder interests, leading to potential misallocation of resources and failure to maximize shareholder wealth
  • Conflicts of Interest: Conflicts arise when managerial objectives differ from shareholder objectives, with managers prioritizing personal benefits or career advancement over profit maximization
  • Moral Hazard: Agents (managers) may take excessive risks without bearing the full costs, benefiting themselves in success but imposing losses on shareholders in case of failure
  • Difficulty in Monitoring: Shareholders may find it challenging to monitor managerial actions effectively, limiting their ability to ensure that managers act in the best interests of shareholders
  • Incentive Realignment: Various methods, such as profit-related pay and stock options, are used to align interests and mitigate agency problems
  • Challenge of Information Asymmetry: Shareholders may struggle to assess the true reasons behind corporate performance, making it difficult to distinguish between managerial incompetence and external economic factors
• Other objectives of firms

  • Growth maximisation
  • Survival
  • Sales revenue maximisation
  • Providing good customer service and quality of product
• Growth maximisation

  By continuing growth, business can achieve economies of scale and associated cost reductions, contributing to managerial prestige and a means of achieving monopoly power by knocking off smaller competitors
• Survival

  Those who are making losses see this as primary objective, common during recession, with the hope of riding out the adverse effects of economic downturn and continuing to grow once the worst is over
• Sales revenue maximisation

  Firms will try to maximise sales revenue, occurring at the level of output where MR=0
• Satisficing principle

  Firms may adopt a strategy of achieving a satisfactory outcome that meets the objectives of different stakeholder groups in the firm, aiming to make enough profit to stop shareholders from being concerned and paying workers high enough wages so they do not look for work elsewhere
• Total profit


  Total revenue - Total cost
• Profit-maximising rule

  Profits are the greatest when addition to sales revenue received from the last unit sold (MR) is equal to the addition to total cost incurred from the production of the last unit of output (MC)
• MC is greater than MR

  Firms should increase output as the cost of production is lower than the revenue received
• MC is less than MR

  Firms should decrease output as it is costing the firm more to produce its last unit of output than it receives in revenue