A Theory of the Firm

by Jensen, Michael C.

• ISBN13: 9780674012295
• ISBN10: 0674012291
• Format: Paperback
• Copyright: 2003-09-30
• Publisher: Harvard Univ Pr

Summary

This collection examines the forces, both external and internal, that lead corporations to behave efficiently and to create wealth. Corporations vest control rights in shareholders, the author argues, because they are the constituency that bear business risk and therefore have the appropriate incentives to maximize corporate value. Assigning control to any other group would be tantamount to allowing that group to play poker with someone else's money, and would create inefficiencies. The implicit denial of this proposition is the fallacy of the so-called stakeholder theory of the corporation, which argues that corporations should be run in the interests of all stakeholders. This theory offers no account of how conflicts between different stakeholders are to be resolved, and gives managers no principle on which to base decisions, except to follow their own preferences. In practice, shareholders delegate their control rights to a board of directors, who hire, fire, and set the compensation of the chief officers of the firm. However, because agents have different incentives than the principals they represent, they can destroy corporate value unless closely monitored. This happened in the 1960s and led to hostile takeovers in the market for corporate control in the 1970s and 1980s. The author argues that the takeover movement generated increases in corporate efficiency that exceeded $1.5 trillion and helped to lay the foundation for the great economic boom of the 1990s.

Table of Contents

Preface	ix
Introduction	1	(8)
I Corporate Governance and the Market for Corporate Control
1 U.S. Corporate Governance: Lessons from the 1980's	9	(7)
2 The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems	16	(47)
3 Active Investors, LBOs, and the Privatization of Bankruptcy	63	(20)
II Agency Costs, Residual Claims, and Incentives
4 Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure	83	(53)
5 Stockholder, Manager, and Creditor Interests: Applications of Agency Theory	136	(32)
6 Rights and Production Functions: An Application to Labor-Managed Firms and Codetermination	168	(37)
7 Organizational Forms and Investment Decisions	205	(22)
8 The Distribution of Power among Corporate Managers, Shareholders, and Directors	227	(24)
Notes	251	(26)
References	277	(24)
Acknowledgments	301	(4)
Index	305