A Theory of the Firm – Governance, Residual Claims & Organizational Forms: Governance, Residual Claims and Organizational Forms - Hardcover

Jensen, Michael C

3.67

12 ratings by Goodreads

9780674002951: A Theory of the Firm – Governance, Residual Claims & Organizational Forms: Governance, Residual Claims and Organizational Forms

Hardcover

ISBN 10: 0674002954 ISBN 13: 9780674002951

Publisher: Harvard University Press, 2001

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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.

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Review:

"The book provides the fundamental building blocks for agency theory and discusses a wide variety of topics, including the nature of man, the theory of the firm, specific and general knowledge, organizational structure, executive compensation, and performance measurement. These essays, which span the past 25 years, illustrate how Jensen's views have evolved and expanded over time...Jensen's integrated theory is a noble attempt to combine economic analysis of markets and behavioral organization theorists' understanding of the internal aspects of organizations."

The book provides the fundamental building blocks for agency theory and discusses a wide variety of topics, including the nature of man, the theory of the firm, specific and general knowledge, organizational structure, executive compensation and performance measurement. These essays, which span the past 25 years, illustrate how Jensen's views have evolved and expanded over time... Jensen's integrated theory is a noble attempt to combine economic analysis of markets and behavioral organization theorists' understanding of the internal aspects of organizations.--J. Barkley Rosser "Journal of Economic Behavior and Organization "

About the Author:

Michael C. Jensen is Jesse Isidor Straus Professor of Business Administration Emeritus, Harvard Business School.

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