This is probably where the possibility of pro-growth bias starts to creep in. Suppose that overall real economic growth is 2% per year; if reinvesting a marginal dollar of profit into the mature company will yield an annualized return of 1%, then management should not make this investment. They should pass that dollar back to the stockholders so they can invest it somewhere else and get more. They probably won't do that, though. If they keep it, they're still managing a company that's a bit bigger than it was, and so they might see bigger salaries, more prestige, and so on. This sort of situation is a conflict of interest between ownership and management inherent in the corporate form of organization.
Wow, this is really interesting stuff, especially this paragraph! Thanks for writing it out.
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timeasmymeasure
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Date: 2010-04-04 04:34 pm (UTC)This is probably where the possibility of pro-growth bias starts to creep in. Suppose that overall real economic growth is 2% per year; if reinvesting a marginal dollar of profit into the mature company will yield an annualized return of 1%, then management should not make this investment. They should pass that dollar back to the stockholders so they can invest it somewhere else and get more. They probably won't do that, though. If they keep it, they're still managing a company that's a bit bigger than it was, and so they might see bigger salaries, more prestige, and so on. This sort of situation is a conflict of interest between ownership and management inherent in the corporate form of organization.
Wow, this is really interesting stuff, especially this paragraph! Thanks for writing it out.