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Abstract
This work attempts to deal simultaneously with two separate criticisms often leveled at the standard profit maximizing model of the firm; namely that the model ignores the fundamental dynamic nature of firm activity and that, with the rise of non-owner operated corporations, profit maximization may no longer be a valid description of firm goals. It presents, as an alternative, an analysis of the behavior over time of a firm whose goal is the maximization, subject to a minimum equity value constraint, of the present value of the stream of utilities arising from the accumulated stock of firm assets. In essence, this is the fully dynamic extension of the steady-state growth maximizing models presented by earlier authors such as Marris and John Williamson.
This model, however, differs from these earlier models in at least two very important ways. First, being fully dynamic, it allows for a variable growth path over time; and in so doing, it yields, secondly, qualitative results (i.e., comparative statics and growth patterns) which are significantly different from those of the profit maximizing model. In addition, this model addresses problems not previously considered by earlier models, such as the effect which various assumptions concerning technology and managerial preferences have on the firm's growth path. It also considers, as a by-product of much of the analysis, the dividend distribution policy of the firm under these various assumptions.
After a survey of previous literature in Chapter One, the basic model is presented in Chapter Two. It is assumed that firm production can be described by a Treadway-type, cost of adjustment production function, and that management's goal is the maximization of the present discounted value of the stream of utilities generated from the accumulation of capital. In this endeavor, it further is assumed that management is constrained by the need to maintain a minimum equity value and to finance all investment internally.
Given this, the remainder of the chapter presents an analysis, via the application of the theory of optimal control, of the utility maximizing path of capital. A general framework by means of which this analysis can be carried out is presented for the case in which production displays constant returns to scale throughout. In addition, a general theorem concerning the dividend behavior of the firm is proved.
In Chapters Three and Four, this general framework is utilized in an analysis of the effect of various assumptions concerning managerial preferences and technology, respectively, on the time path of optimal capital accumulation by the firm. In Chapter Three it is shown how management's attitude toward future capital accumulation, represented by the assumption that the managerial utility function is either of the constant, increasing, or decreasing absolute risk averse type, affects of a negative net marginal value product of capital on firm growth; and it extends the analysis to allow for variable returns to scale production.
In the final chapter the results of the previous analysis are summarized, and comparisons are made between this model and the steady-state models. An important result of this analysis is that, unlike the steady-state models, this model yields results that are qualitatively different from the results of profit maximizing models. One of particular interest is that while increases in the market interest rate lead to reduced growth under profit maximization, they may lead to increased growth under growth maximization.
