Towards a Property Rights Foundation for a Stakeholder Theory of the Firm

This paper suggests that due to the changing nature of the firm in today's business world, viewing shareholders as the sole residual claimants is an increasingly tenuous description of the actual relationships among a firm's various stakeholders. Thus, a shareholder wealth perspective is increasingly unsatisfactory for the purpose of accurately answering the two fundamental questions concerning the theory of the firm: that of economic value creation, and the distribution of that economic value. The thesis of the current paper is that examining the firm from a property rights perspective of incomplete contracting and implicit contracting provides a solid economic foundation for the revitalization of a stakeholder theory of the firm in strategic management and in expanding the resource-based theory of the firm. In order to make progress in strategic management, a clearer conceptual and empirical understanding of implicit contracting is required. The perspective outlined in this paper provides for a more accurate direction towards both measuring economic value creation, and analyzing the distribution of that value. It is also submitted that such a perspective has important implications for corporate governance, particularly when managers must balance conflicts among stakeholders to achieve the goal of maximizing economic value.