The Principal-Agent Problem

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 constraint

TC
TR
P
O
Q
Q3
Q1
Q2
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

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