Ownership Structure, Profit Maximization, and Competitive Behavior

42 Pages Posted: 29 Jul 2009

See all articles by Govert Vroom

Govert Vroom

University of Navarra, IESE Business School

Brian T. McCann

Purdue University - Krannert School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 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: profit, behavior, goals, firms, market

Suggested Citation

Vroom, Govert and McCann, Brian T., Ownership Structure, Profit Maximization, and Competitive Behavior (July 1, 2009). IESE Business School Working Paper No. 800. Available at SSRN: https://ssrn.com/abstract=1440184 or http://dx.doi.org/10.2139/ssrn.1440184

Govert Vroom (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Brian T. McCann

Purdue University - Krannert School of Management ( email )

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

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