CVP under Uncertainty and the Manager's Utility Function Revisited |
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Authors: | Chan Derek K Pong Wong Kit |
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Institution: | (1) Department of Accounting, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong;(2) School of Economics and Finance, University of Hong Kong, Pokfulam Road, Hong Kong |
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Abstract: | This paper re-examines the model of Kim, Abdolmohammada, and Klein (KAK, 1996) in which owners of a firm delegate the production decision to a risk-averse manager. Conflict of interest between the owners and the manager emerges as the latter maximizes the expected utility of his/her own wealth rather than that of the firm's profits. This paper shows that the results of KAK on the expected contribution margin and the excess return on the risky asset are flawed. Furthermore, while KAK study the effects of delegating the production decision to the manager on the firm's optimal output based on the mean-variance analysis, this paper derives parallel results within utility functions exhibiting constant absolute risk aversion and any arbitrary probability distribution functions. |
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Keywords: | Cost-volume-profit analysis conflict of interest risk aversion multiple sources of uncertainty |
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