A Theory of Firm Objectives and Performance Based on Owner Heterogeneity
31 Pages Posted: 23 Apr 2013 Last revised: 16 Aug 2013
Date Written: April 23, 2013
All firm performance measurement requires knowledge of or assumptions about the firm’s objectives. I provide a framework for the firm’s objective function based on the extent to which owners differ in the utility derived from alternative firm actions and outcomes. I theorize as owner utility heterogeneity increases, the less likely the firm will pursue actions to satisfy owners’ nonpecuniary preferences. This framework provides an important reconciliation between the theory of the entrepreneur and the theory of the firm by showing how firms evolve from maximizing the financial and nonpecuniary benefits of specific owners to focusing primarily on value maximization as the firm objective. Owner utility heterogeneity also provides a framework to evaluate firm performance, providing theoretical guidance on firm performance measurement for researchers and practitioners.
JEL Classification: L21, L26
Suggested Citation: Suggested Citation