Some of the early work was conducted by Bearle & Means (1932). They discussed how in the modern corporation the control of the firm was no longer in the hands of the owners. Their argument revolved around managers having discretion over the goals and strategies of the enterprise. Most importantly, management does not have to maximize returns to owners.
A few of the main managerial theories come from Baumol (1968), Marris (1963), and Williamson (1964). They discuss how managers maximize a utility function that includes power, status, income, among other things. A large firm increases power, status, and income.
Therefore, management prefers growth maximizing rather than profit maximizing strategies.
The managerial theories are often used to explain diversification, mergers and acquisitions. Furthermore, the emphasize how management often prioritizes maximizing the size of the empire.
This view has two implications.
- Economic Welfare Implication:
- Presumption against large diversified enterprises.
- Strategy Implication
- Much diversification may dissipate rather than create value.
- For example, the presumption against unrelated or conglomerate diversification (Rumelt, (1974)).
This theory also has counterpoints. Most notably:
- Penrose (1955): Diversified growth may represent the efficient use of under-utilized productive services (i.e. slack resources) that cannot be separated out for sale.
- Firms have limited rate of growth and size due to the limited supply of managerial services.
- Chandler (1962, 1977, 1985): Vertical integration was driven by a desire to keep core assets fully and efficiently employed (assurance of supply), while diversification was about the realization of economies of scope.
(Adapted from course notes)
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