The Misapplication of Mr. Michael Jensen: How Agency Theory Brought Down the Economy and Why it Might Again

By F. Dobbin, Jiwook Jung. 2010

150 citations recorded by the source corpus.

Agency theorists diagnosed the economic malaise of the 1970s as the result of executive obsession with corporate stability over profitability. Management swallowed many of the pills agency theorists prescribed to increase entrepreneurialism and risk-taking; stock options, dediversification, debt financing, and outsider board members. Management did not swallow the pills prescribed to moderate risk: executive equity holding and independent boards. Thus, in practice, the remedy heightened corporate risk-taking without imposing constraints. Both recessions of the new millennium can be traced directly to these changes in strategy. To date, regulators have proposed nothing to undo the perverse incentives of the new “shareholder value” system.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/dcb7b605c44f659cc1d820967f0e684af4db4e51

Citations in the corpus

• The Routledge International Handbook of Financialization (2020, unknown): “Increasing the value of the owner’s portfolio by leveraged buyouts, stock repurchases, mergers and acquisitions became a top priority of business strategy (Fligstein 2008; Dobbin and Jung 2010).”
• From social control to financial economics: the linked ecologies of economics and business in twentieth century America (2009, unknown): “November 4, 1987, p. 1. scandals showed that options, strike prices, and preferred stock could be mere covers for facilitating fraud (Dobbin and Jung 2010).”
• Revenge of the Managers (2012, unknown): “More broadly, it implies that future research in economic sociology should look beyond strategic decoupling and symbolic management of shareholders in order to probe the (often paradoxical and unintended) structural consequences of dominant ideologies and strategies (cf. Dobbin and Jung 2010).”
• The Sociology of Finance (2011, unknown): “Justified by agency theory and pushed by institutional investors (Dobbin & Jung 2010), shareholder value became a guiding principle in corporate governance (Davis 2009).”
• From performativity to political economy: index investing, ETFs and asset manager capitalism (2016, unknown): “…particular, Jensen and Meckling’s (1976) writings on the principal-agent model of corporate governance, a key driver and element of the shareholder value model, ‘had a more rapid, and more thorough, effect on corporate managers than any other theory hatched in academia’ (Dobbin and Jung 2010: 36).”
• Financialization in the workplace: Hegemonic narratives, performative interventions and the angry knowledge worker (2013, unknown): “Furthermore, top management do not always act as rational agents of capital; they can take careless risks (Dobbin & Jung, 2010), exercise discretionary power (Gomez, 2004), retain and reinvest (Froud et al., 2006) and be affected by internal and external relationships (Pye, 2004).”
• Income Dynamics, Economic Rents, and the Financialization of the U.S. Economy (2011, unknown): “Dobbin and Jung (2011) suggest the shareholder value movement was a misapplication of agency theory’s notion that it is necessary to align executives’ incentives with stockholders’ long-term interests.4 Institutional investors encouraged corporate CEOs to adopt the aspects of agency theory they…”