Ownership Structure, Profit Maximization, and Competitive Behavior

41 Pages Posted: 3 Mar 2009

See all articles by Brian T. McCann

Brian T. McCann

Purdue University - Krannert School of Management

Govert Vroom

University of Navarra, IESE Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2009

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.

Keywords: ownership structure, profit maximization, competitive behavior, entry, exit, pricing

JEL Classification: L21, M10, D82

Suggested Citation

McCann, Brian T. and Vroom, Govert, Ownership Structure, Profit Maximization, and Competitive Behavior (January 12, 2009). Atlanta Competitive Advantage Conference 2009 Paper. Available at SSRN: https://ssrn.com/abstract=1346931 or http://dx.doi.org/10.2139/ssrn.1346931

Brian T. McCann

Purdue University - Krannert School of Management ( email )

403 W. State Street
West Lafayette, IN 47907
United States

Govert Vroom (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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