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Ownership structure, profit maximization, and competitive behavior

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  • Vroom, Govert

    ()
    (IESE Business School)

  • Mccann, Brian T.

    (Krannet School of Management)

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    Abstract

    We question the broad applicability of the assumption of profit maximization as the goal of the firm and investigate how variance in objective functions across different ownership structures affects competitive behavior. While prior work in agency theory has argued that firms may fail to engage in profit maximizing behaviors due to misalignment between the goals of owners and managers, we contend that we are unlikely to observe pure profit maximizing behavior even in the case of the perfect alignment of goals that exists in owner-managed firms. We compare the competitive behaviors of owner-managed and professionally managed firms and find that, contrary to the expectations of agency theory, professionally managed firms are more likely to engage in behaviors consistent with profit-maximization goals. Consistent with the view that owner-managers are less concerned with maximizing profits, we observe that the entry, exit, and pricing decisions of owner-managed firms are all relatively less responsive to the underlying economic attractiveness of the markets in which they operate.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/800.

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    Length: 42 pages
    Date of creation: 07 Jul 2009
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0800

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Keywords: profit; behavior; goals; firms; market;

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