Introduction

In the previous chapter we saw that what the management is really after in most large corporations, presumably, is not the profits and market value of the firm as hypothesized by the traditional theory but the growth of the firm, although survival, of course, must come before everything else. More formally, management is assumed to maximize the growth rate of the firm subject to the constraint that it should survive any outside interference or to maximize a utility function with the probability of survival and the growth rate as its arguments, each with positive marginal utility. The growth rate of the firm in this context is defined as the rate of growth of assets the firm owns; however, in the analysis that follows this is not too important because it is confined to a steady state in which assets, sales, profits, and other variables grow at a common rate. This chapter aims to give a detailed analysis of this objective function of the management.

The idea that management does not maximize profits (or value) is not new and in fact several efforts have been made in the past few decades to develop new theories of the firm. Setting aside the satisficing or behavioral models [see, e.g., Simon (1955); Cyert and March (1963); Winter (1971); and Radner (1975)], we find that these works are usually brought together under the name of the managerial theory of the firm.