ABSTRACT
In many large rms the owners (shareholders) are not the managers. Owners effectively employ managers to act on their behalf. As with the doctor-patient relationship, principalagent theory provides a useful framework to analyse the implications of this arrangement. Managers may act as imperfect agents for the owners and may pursue objectives other than pro t maximisation. One model suggests that managers maximise revenue subject to a pro tability constraint imposed by shareholders and possibly by the danger of take-over by another rm. There are several reasons why managers may maximise revenue:
1 The earnings of top managers tend to be related to sales. 2 Large sales give prestige to managers. 3 High revenue avoids having to make staff redundant.
