Baumol’s “Sales Maximisation Hypothesis?” Essay

To what extent does empirical evidence on corporate objectives last the predictions of Baumols Sales Maximisation Hypothesis?In Neo-Classical Economic surmisal of a fuddled, the owners of a regular argon involved in the daytime to day running of the firm, and on that pointfore their main desire is loot maximation. In reality firms be most likely run by motorcoachs and non by the owners. Because of this in that respect is a lack of goal congruence among the two. Baumol (1959) suggests that manager controlled firms argon more likely to have gross r heretoforeue tax maximation as their main goals rather than profit maximisation favoured by shareholders.He shows that there are several explanations for the managerial emphasis on sales maximisation rather than maximising dough sources of debt closely superintend sales of firms and are more forgeting to finance firms with growing or large sales figures lay- off necessitated by fall in sales leads to industrial unrest and unfavourable investment climate and with decreased sales (and consequently decreased market power) the firm enjoys lesser powers to adopt effectual competitive tactics. As well as managers power and prestige and raze salaries are more closely cor tie in with sales as to bread. Judged in this perspective, sales maximisation can be said to be the supreme objective in managerial decision making, where ownership and management are clearly separated.This review of evidence will examine the advantages and limitations of Baumols supposition on sales-maximisation. The mass of empirical evidence shows that there poor correlation surrounded by the remuneration of top managers and the profit performance of their comp alls, instead sale revenue enhancement is seen as the major contri plainlyor to the salaries of managers. McGuire et al. (1962) tried to test Baumols contention that managers salaries are much more closely related to scale of operations of the firm than with profitabilit y. They devised simple correlation coefficients mingled with executive income and sales revenue and profits over the seven-year time period 1953-9 for 45 of the largest 100 industrial corporations in the US. Their explore showed that the correlation between salaries and sales was much greater than with profits. They recognise that there are serious limitations with using simple correlation analysis and the point that correlation does not necessarily imply causation. Due to this the research they make cannot be proved to be decisive. D. R. Roberts found that executive earnings are correlated closely with the size of sales and not the level of profits. He used a cross section of 77 american firms for the period 1948-50.This evidence supports Baumols claim that managers have strong reason to pursue amplification of sales rather than increase profits. Conyon and Gregg (1994) produced a study of 177 firms between 1985 and 1990, it showed that take over of the top executives in la rge companies in the UK was most strongly related to relative sales harvest (i.e. relative to competitors). They also found that it was just now weakly related to a pertinacious destination performance evaluate ( be shareholder returns) and not at all to current accounting profit. Furthermore, growth in sales resulting from takeovers was more highly rewarded than internal growth. This evidence supports baumols effrontery that sales maximisation is better related than profit, to executive rewards and corporate performance. lucrativeness and executive pay appear to be largely unrelated, suggesting that other managerial objectives might be given priority e.g. sales revenue. However total remuneration packages for top executives may be linked to profitability, helping to align the interests of managers more closely to the interests of shareholders.Shipley (1981), in a major study cerebrate that further 15.9% of 728 UK firms questi adeptd are true profit maximisers. The majority of the firms answered that the aim of their firms is for fair to middling profits. Hornby (1994) conducted a study off 77 Scottish companies and found that only(prenominal) 25% of the respondents are profit maximisers according to the Shipley test. And again the majority of the firms preferred satisfactory profits to profit maximisation. Although the study tells us little about sales maximisation, Shipley found that it was ranked fourth among principle determine objectives, and nearly half the firms included sales revenue as at least part of their garnish of objectives. Larger companies were the ones that cited sales revenue as their principal goal. Since larger companies have a greater separation between ownership and management control, this lends support to Baumols theory. Marby and Siders (1966/7) computed correlation coefficients between sales and profits over 12 years, 1952-63, for 120 large American organisations. Zero or negative correlations between profits and sales w ould support Baumols hypothesis.The findings showed positive satisfying correlations between sales revenues and profits. This does not necessarily contradict Baumols hypothesis as sales and profits are positively correlated in Baumols modeling up to the point of maximising profits. Even when they concentrated on true data from 25 companies which they thought had been operating at scales of output beyond the levels corresponding to maximum profit. Correlations between profits and sales were still more often than not positive. This evidence is interpreted as refuting the sales-maximisation hypothesis. These studies solicit the case for and against Baumols theory of sales-maximisation. Although there have been some studies conducted to test Baumols hypothesis, the empirical evidence is not conclusive in favour for or against the sales-maximisation hypothesis.Many argue that Baumols theory has many flaws, such persons are M H Peston and J R Wildsmith. behavioural theory opposes th e idea of a firm seeking to maximise any objective. Management are more likely to hold a set of minimum targets to hold the various stakeholder groups in balance. In practice, profit maximisation in the long term is a major goal for firms, but sales revenue is an important short term goal, though even here a profit target may still be part of the goal set. A widely used technique in the management of larger firms, portfolio planning, would seem to support the behaviourist view that no single objective will usefully help predict firm behaviour in a given market.In Neo-Classical Economic theory of a firm it suggests, the owners of a firm are involved in the day to day running of the firm, and therefore their main desire is profit maximisation. Managers are supposed to maximise shareholders wealth by investment nitty-gritty such as CAPM, NPV and ARR. This is the traditional means for the modern day manager to increase shareholder wealth. Agency theory explains that shareholders and ma nagers have a consanguinity which is crucial to the modern firm. Managers run the company on behalf shareholder and shareholders will reward them with high salary. However this is not always the case as human nature dictates that self-interest, wealth, and power will come into the equation. Managers may start up building empire, maximise sales and take on long term and complicated projects which only they understand and this will make it difficult for shareholders to gouge them.This is typical of most western economies and former chief executive policeman of News international James Murdoch argues in Mctaggart lecture 2007, the only steady-going perpetual guarantor of independence is profits signalling that maximising profits is the only compass to measure success. This is reflective of the neoclassical economic theory and this prove will examine the advantages and limitations of sales maximisation. . argument for the theory of sales maximisation but there is serious limitation s and that is the behavioural difference between long run profit maximisation and sales maximisation that there are no conclusive econometric tests as the difference is very subtle. and so there has to be more future research into testing what the blusher differences are between sales and profits. Also there has to be one to one interviews into the psychology of Managers in the firms that they running as some argue for profits whilst some argue for sales e.g. James Murdoch speech. The use of postal questionnaires for use in studies can bring evidence that is not In summary that is conducted for Baumols hypothesis empirical evidence is not conclusive in favour for and against the sales maximisation hypothesis.