Corporate Law and Corporate Governance

We have seen a revival in interest in corporate law and corporate governance since the 1980s, as researchers applied the tools of the new institutional economics and modern corporate finance to analyze the new transactions emerging in the 1980s takeover wave. This article focuses on three mechanisms of corporate governance to illustrate the analytical usefulness of transaction cost economics for corporate law. They are the board of directors; relational investing, a form of block ownership in which a large shareholder is more actively involved in firm management than is ordinarily expected of non-management shareholders; and the choice of law governing shareholder-manager relations, referred to in the literature as state competition for corporate charters. Each of the three sections in the article sketches first the theory of the corporate governance mechanisms from the perspective of transaction cost economics and then addresses the question whether corporate governance matters, by discussing the empirical evidence on whether the mechanism is effective. In addition to limning Williamson's contribution, the objective is to relate theory and data, to ascertain where we are, 20 years after Williamson's fundamental contribution was the first articulated in Markets and Hierarchies, and over a decade after the corporate law applications were first explicitly worked out.