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Contract costs, stakeholder capitalism, and ESG

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  • Eugene F. Fama

Abstract

Observed contract structures are competitive solutions to the problem of maximizing stakeholder welfare when contracting is costly. Winning contract structures typically set fixed payoffs for most stakeholders, with residual risk borne by shareholders, who then get most of the decision rights. With rising interest in environmental, social, and governance (ESG) issues, there is sentiment for replacing the max shareholder wealth decision rule with max shareholder welfare. This view does not recognize that investors view max welfare in terms of their overall consumption‐investment portfolios. Since firms are not privy to the total ESG exposures of shareholders, max shareholder wealth is the appropriate decision rule.

Suggested Citation

  • Eugene F. Fama, 2021. "Contract costs, stakeholder capitalism, and ESG," European Financial Management, European Financial Management Association, vol. 27(2), pages 189-195, March.
    • Handle: RePEc:bla:eufman:v:27:y:2021:i:2:p:189-195
    DOI: 10.1111/eufm.12297
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    References listed on IDEAS

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    1. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March.
    2. Hart, Oliver & Zingales, Luigi, 2017. "Companies Should Maximize Shareholder Welfare Not Market Value," Journal of Law, Finance, and Accounting, now publishers, vol. 2(2), pages 247-275, November.
    3. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    4. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    5. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
    6. Fama, Eugene F, 1990. "Contract Costs and Financing Decisions," The Journal of Business, University of Chicago Press, vol. 63(1), pages 71-91, January.
    7. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May.
    8. Kenneth J. Arrow, 1950. "A Difficulty in the Concept of Social Welfare," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 328-328.
    9. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
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    Cited by:

    1. Doukas, John A. & Zhang, Rongyao, 2021. "Managerial ability, corporate social culture, and M&As," Journal of Corporate Finance, Elsevier, vol. 68(C).
    2. Krishna Raj Bhandari & Mikko Ranta & Jari Salo, 2022. "The resource‐based view, stakeholder capitalism, ESG, and sustainable competitive advantage: The firm's embeddedness into ecology, society, and governance," Business Strategy and the Environment, Wiley Blackwell, vol. 31(4), pages 1525-1537, May.
    3. Wang, Hu & Shen, Hong & Li, Shouwei, 2023. "ESG performance and stock price fragility," Finance Research Letters, Elsevier, vol. 56(C).
    4. Chowdhury, Rajib & Doukas, John A., 2022. "Protection of trade secrets and value of cash holdings: Evidence from a natural experiment," Journal of Banking & Finance, Elsevier, vol. 143(C).
    5. Beck, Donizete & Ferasso, Marcos, 2023. "How can Stakeholder Capitalism contribute to achieving the Sustainable Development Goals? A Cross-network Literature Analysis," Ecological Economics, Elsevier, vol. 204(PA).
    6. Chowdhury, Rajib & Doukas, John A. & Park, Jong Chool, 2021. "Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 69(C).

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