A Theory of the Firm

By Michael C. Jensen. 2001

458 citations recorded by the source corpus.

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 propositions 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 exceede $1.5 trillion and helped to lay the foundation for the great economic boom of the 1990s.

Subfields: Accounting, Organizational Behavior and Human Resource Management, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/3fc17ec407c53036d9c9e8b0403406514fe3437d

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Citations in the corpus

Remuneration: Where We've Been, How We Got to Here, What Are the Problems, and How to Fix Them (2004, background): “In their 1990 study of CEO compensation Jensen and Murphy (1990a) had this to say: “Are current levels of CEO compensation high enough to attract the best and brightest individuals to careers in corporate management? The answer is, probably not.”
Building a Pathway to Cooperation: Negotiation and Social Exchange between Principal and Agent (2006, background): “Rather than impose theoretically interesting contracts as in Experiment 1, Experiment 2 examined the process by which a principal and an agent discuss possible terms of employment.”
Mergers & acquisitions research: A bibliometric study of top strategy and international business journals, 1980–2010 (2014, background): “5 Jensen, M. (1983) Organization theory and methodology.”
Corporate governance and impact on bank performance (2013, background): “The stewardship theory maintains that managers are not motivated by individual goals but rather they are stewards, whose motives are aligned with the objectives of their principalsshareholders [12]; as opposed to the agency theory which claims that conflict of interest between managers and sharehold”
Behavioral Agency Theory (2015, background): “Contribution Agency theory is a central component of the modern theory of the firm (Jensen, 2000; Roberts, 2004).”