Academic journal article Journalism Quarterly

How Managerial Ownership Affects Profit Maximization in Newspaper Firms

Academic journal article Journalism Quarterly

How Managerial Ownership Affects Profit Maximization in Newspaper Firms

Article excerpt

Owner managers tend to place less emphasis on profits.

A fundamental assumption of neoclassical microeconomic price theory is that managers in firms make decisions designed to maximize profits. This assumption allows economists to predict seller behavior in various market situations.1 A good deal of microeconomic theory would be threatened if this assumption is not true.

One commonly explored issue in the economics literature is whether the separation of ownership and managerial control affects the drive for profit maximization. Such a bias of firm or manager behavior would need to be considered in any model that attempts to predict seller behavior in a market.

This issue may appear to be esoteric to the study of newspaper economic behavior. In fact, the issue of whether newspapers owned by larger corporations or chains have a greater interest in profits than family or locally-owned newspapers is a fairly common concern. Ownership is more likely to be separated from managerial control in chain or corporate newspapers where the key manager is less likely to have a substantial personal ownership stake. The conventional wisdom in journalistic circles is that chain or corporate newspapers tend to be more concerned with profit maximization. There is some anecdotal and case study evidence to support this view.2 In particular, Soloski's participant observation of a small daily recently acquired by a chain found staff cutbacks, higher story counts and a publisher worried that low profits would cost him his job.

This research attempts to go beyond the "single instance" nature of previous efforts. With a small sample of newspapers this research will explore the issue of whether different levels of a manager's ownership of a newspaper affects the manager's profit maximizing attitudes and behavior.

Theoretical Framework

Managers have a wide variety of goals they can pursue as the bases for making their decisions. Neoclassical theory relies on profit maximization as the motivator for managers. However, several rival goals have been proposed. Corporate size and its rate of growth have been identified as possible managerial goals.' This would make maximizing assets, sales revenue, or the growth of these factors the targets of managerial decisions.4 A manager's compensation may be more related to these factors than to maximizing profits, particularly if the manager has no ownership interest in the firm.

Risk avoidance may be another goal as this affords the manager the opportunity of ignoring tough decisions that might backfire-but that might lead to higher profits as well.5 Williamson has proposed the "expense preference theory." This theory states that in management-controlled firms, managers maximize their own utility rather than the firm's profit. This utility was found to be a function of such items as staff size, office furnishings, a high salary and other perquisites.6

Several studies have grappled with the issue of manager ownership in a firm as a possible factor that may systematically alter profit maximizing behavior. Typically, these studies divide firms into two groups: "owner-controlled" firms where one individual owns a sufficient proportion of equity to effectively control the firm's decisions, and "manager-controlled" firms where no individual has such ownership control.

We might suspect that an ownercontrolled widgets firm may be more concerned with profit maximization than a manager-controlled widgets firm. In such a firm the owner controls managerial decisions and has a greater stake in the profitability of the firm as the key source of personal income. The key manager in a manager-controlled widgets firm might be more concerned with maximizing sales, personal salary, perquisites and avoiding risk, and only incidentally concerned with profits. A brief review of the literature on this topic of the separation of ownership from managerial control shows the majority of empirical evidence supports this theory. …

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