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CVP under Uncertainty and the Manager's Utility Function Revisited

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  • Chan, Derek K
  • Wong, Kit Pong

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. Copyright 1999 by Kluwer Academic Publishers

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  • Chan, Derek K & Wong, Kit Pong, 1999. "CVP under Uncertainty and the Manager's Utility Function Revisited," Review of Quantitative Finance and Accounting, Springer, vol. 12(2), pages 159-170, March.
    • Handle: RePEc:kap:rqfnac:v:12:y:1999:i:2:p:159-70
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    Cited by:

    1. James A. Yunker & Dale Schofield, 2005. "Pricing training and development programs using stochastic CVP analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 191-207.

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