Theory Of The Firm-are Firms J

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Since ownership gives a person a claim on the profit of the firm, the greater the firm's profit, the higher the owners’ income. Hence the owners goal will be profit maximisation.
When managers’ salary stays unaffected by higher profits they may pursue other goals to raise their personal utility.
This behaviour strikes the critical observer regularly when for example reading or watching the financial media. Managers there often rather mention the rises in sales or the growth of their company rather then the profits. Some economists like Begg (1996) argued that managers have an incentive to promote growth as managers of larger companies usually get higher salaries. Others like Williamson (1964) suggested that managers derive further utility from perquisites such as big offices, many subordinate workers, company cars etc. Fanning (1990) gives a rather bizarre example: When WPP Group PLC took over the J. Walter Thompson Company, they found that the firm was spending ...

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