'Managerialism' and Risk-Return Performance

The appearance of 'managerial' models of firm behavior such as those of Baumol 1, Williamson 8, and Monsen and Downs 6, has caused, within the past few years, a great deal of discussion and some (lesser) amount of empirical testing, notably by Kamerschen 3, Monsen, Chiu and Cooley 5, and Radice 7. The empirical tests to date have concentrated on rate-of-return statements of managerial theories and their implication for profit-seeking behavior. This is, of course, that owner-controlled firms are, according to the managerialists, expected to earn higher rates of return than manager controlled firms. These tests, however, have not addressed the more complete predictions of performance made by the managerialists, that the manifest behavior of these two types of firms should differ in both return and risk dimensions. Baumol 1, 90-91 and Monsen and Downs 6, 226 imply that because of assymetrical opportunities for return-risk income combinations on the part of the managers in the two types of firms, the owner-controlled firm will produce higher and more variable income streams than will the manager-controlled firm. In addition to addressing the managerial question, a test of risk-return performance is related to utility-based models of the firm, specifically those implying risk aversion. These propositions can be tested with variations of a basic equation of the form: