The Principal-Agent Theory Of The Firm

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As per the above discussion question, the aim of this paper is to review about the traditional theory of the firm is laid off due to the principal-agent problem.

‘Theory of the Firm ' is a microeconomic concept that states that firms (organisations) subsist and make decisions in order to maximize profits. Trade work together with the market to establish pricing and demand and then distribute resources according to representation that give the impression of being to maximize net profits. The principal goal of an organization is value maximization. The value of a firm is determined by the long-term confrontation of managerial decisions on profits.

'Principal-Agent Problem ' is the conflicts of interest and ethical exposure issues that occur
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Sales maximization is a way to benefit from business where the organisation 's main objective is to produce as much income as possible. This means accomplish the maximum potential sales volume, without making a loss. Profit maximization is an objective where the organisation proposes to produce the maximum net income over time.

Baumol (1959) build up the “Revenue Maximization Hypothesis”. This theory known as that after a minimum amount of profits has been reached organisation that operate in a monopoly market will aim for sales revenue maximization and not profit maximization. This way organisation will generate further than the profit maximizing level of output. This can be experienced by looking at the number of organisation which have a minimum profit limitation.

Baumol recommended that organisations are more interested in sales for various reasons.
Decreasing sales may make it complex to raise finance and may lead a unconstructive consciousness of the organisation to potential consumers and distributors. Manager’s pay is commonly correlated more strongly to sales than to profits. Baumol was not suggesting that organisations challenged to maximize sales because it may guide to larger market share and profits in the long run. In this model sales maximization was the definitive
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AAPL in February reversed its stance on a corporate-governance measure related to executive compensation, implementing a new rule that executive officers must hold triple their base salary in company stock. Apple’s new policy requires executive officers to hold three times their annual base salary in stock, and executives have five years to satisfy the requirement. The document also restates the company’s existing policy of requiring the chief executive to hold 10 times his annual base salary and nonemployee directors to hold five times their annual retainers, policies that were mentioned in the January proxy Tim Worstall.

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