Page 320 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-19: Behavioural and Managerial Theories of the Firm

For growth of a firm, managers need to get more reciation profit for investing more funds. This rises the Notes
reciation ratio, which further gets close to high profits and high growth rates until the profit point not goes to
M. This is also not a optimum equilibrium point of firm because managers feel that the combination of high
profit and high growth rate is approved by shareholders and it does not affect his job. So he will want to get
more reciation ratio, will invest more funds, will advertise and will grow the firm’s growth rate. As a result,
growth-supply curve will flat and will look like GS as shown in the place of GS curve where cuts at point
3
3
E in Fig. 19.1. On this point, the distributed profit is low for shareholders. But it is in good quantity to satisfy
the shareholders. There is neither fear of falling price of shares not to controlled this form by the forms. Job
is secured for the managers also. Thus, point E is the optimal balance point of the form. If managers apply
more reciation ratio then the distributed profit will decrease more and the shareholders will not satisfy which
warned the job security to them. Current shareholders can take decision to change managers. If the distributed
profit among shareholders gets low and thus, the share prices fall then that firm can take over by another.
Marris has defined the fear of takeover the firm by another in the form of valuation ratio, which works
as a blockage in its growth rate. Valuation ratio is the ratio with its book price of the share of the
firm. According to Marris, firm will not want to grow after a point because high point is warning
for financial security and they will need minimum analysation ratio which gives the optimum factors
of scale to shareholders. The valuation ratio can be affected by the rate of new shares. The relation
between valuation ratio and growth rate has described in Fig. 19.2, where the valuation ratio is shown
in horizontal axis while growth rate is shown in vertical axis. The share of valuation ratio is parabolic
which is V. This is due to stock market behaviour and growth rate in equation of G. When growth rate
is G , the top most point of valuation ratio is M. In this point, when growth rate increases then profit
1
rate also increases. The growth rate of firm is expected to rise as point M of G . This happens because
1
the managers will be ready to exchange the profit of high valuation ratio against the high growth rate
of firm. So they will select high growth rate G and valuation ratio V accordingly. This is minimum
2 1
valuation ratio which protects the firm to take over and gives high returns of scale.
Fig. 19.2

M

Valuation Ratio V 1

V

O G G
1 2
Growth Rate

Self Assessment
Multiple choice questions:
4. According to Marris, the valuation ratio does .................... to the growth rate of capital supply.
(a) fixed (b) low (c) more (d) none of these
5. The valuated profit is average of total profit is .................... average.
(a) opt (b) rest (c) equal (d) none of these

LOVELY PROFESSIONAL UNIVERSITY 313