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Corporate Finance, the Theory of the Firm, and Organizations

  • Patrick Bolton
  • David S. Scharfstein

Much of the modern research on firm boundaries, following Ronald Coase (1937), assumes that firms are run by owner-managers. This contrasts with the agency literature, following Adolph Berle and Gardiner Means (1932), that emphasizes the problems that arise when managers are not owners. In this paper, the authors argue that a richer theory of the firm should integrate Coase and Berle and Means. They illustrate this point by reexamining the oft-cited merger of General Motors and Fisher Body. The authors also show how linking these literatures can be used to understand one of the key roles of corporate headquarters, the allocation of capital.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.4.95
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 12 (1998)
Issue (Month): 4 (Fall)
Pages: 95-114

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Handle: RePEc:aea:jecper:v:12:y:1998:i:4:p:95-114
Note: DOI: 10.1257/jep.12.4.95
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  7. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
  8. Williamson, Oliver E, 1988. " Corporate Finance and Corporate Governance," Journal of Finance, American Finance Association, vol. 43(3), pages 567-91, July.
  9. Hart, O. & Moore, J., 1989. "Default And Renegotiation: A Dynamic Model Of Debt," Working papers 520, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, vol. 54(6), pages 2215-2239, December.
  11. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  12. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  13. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  14. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  15. Meyer, Margaret A & Milgrom, Paul & Roberts, Donald John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," CEPR Discussion Papers 665, C.E.P.R. Discussion Papers.
  16. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  18. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
  19. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
  20. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1211-30, November.
  21. Denis, David J & Denis, Diane K & Sarin, Atulya, 1997. " Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, American Finance Association, vol. 52(1), pages 135-60, March.
  22. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  23. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  24. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
  25. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  26. Matsusaka, J.C., 1991. "Takeover Motives During the Conglomerate Merger Wave," Papers 91-33, Southern California - School of Business Administration.
  27. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  28. David S. Scharfstein, 1998. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates," NBER Working Papers 6352, National Bureau of Economic Research, Inc.
  29. Kaplan, Steven N & Weisbach, Michael S, 1992. " The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-38, March.
  30. Ralph A. Walkling & Michael S. Long, 1984. "Agency Theory, Managerial Welfare, and Takeover Bid Resistance," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 54-68, Spring.
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