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A Theory of the Firm: Governance, Residual Claims, and Organizational Forms 1st Edition
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It is aimed specifically at research scholars in financial economics, strategic management, organizational theory, and public policy. Because it is a collection, the papers tend to vary in style and technicality from impassioned advocacy (chapter 3) to general narrative (chapter 2) to formal mathematical modeling (chapter 6). Deliberately little was done to reedit the papers for flow and while this tends to give the reader mental whiplash as he tries to adjust between chapters, it maintains the integrity of the original thoughts that went into the original papers. It makes a good first book for Ph.D. students and scholars new to the field needing a quick summary of a half-century of theoretical development; and because only they would have the tenacity to plow through the formal models.
The ideas in the book are not new to scholars familiar to the field, but they do represent the theoretical cutting edge, which attests to the robustness of Prof. Jensen's ideas (chapter four was first published in 1976) or to the more cynical - a lack of theoretical advancement. Because they are brought together in one place, the book neatly presents the historical development and theoretical arguments in a way that sorting through a bunch of papers cannot.
The main point the book makes is that one cannot build a complete theory of the firm, typically encountered in traditional production models, without special consideration for the governance mechanisms that ensure the efficient deployment of resources and distribution of wealth.Read more ›
U.S. public corporations are characterized by a separation of ownership and control: the firm's nominal owners, the shareholders, exercise virtually no control over either day to day operations or long-term policy. Instead, control is vested in the hands of professional managers, who typically own only a small portion of the firm's shares. The separation of ownership and control characteristic of U.S. corporations has costs: "The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge . . . ." (Berle and Means, 1932). Modern scholars refer to the consequences of these divergences as agency costs, following Jensen and Meckling (1976), which are conventionally defined as the sum of the monitoring and bonding costs, plus any residual loss, incurred to prevent shirking by agents. In turn, shirking is conventionally defined to include as any action by a member of a production team that diverges from the interests of the team as a whole. As such, shirking includes not only culpable cheating, but also negligence, oversight, incapacity, and even honest mistakes.Read more ›