Abstract

http://ssrn.com/abstract=1581814
 
 

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The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems


Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)


Journal of Applied Corporate Finance, Vol. 22, No. 1, pp. 43-58, Winter 2010

Abstract:     
This article, which is based on the author’s Presidential address to the American Finance Association in 1993, argues that squeezing out excess capital and capacity is one of the most formidable ongoing challenges facing not only the U.S. economy, but the economies of all industrialized nations. In making this argument, the article draws striking parallels between the 19th-century industrial revolution and worldwide economic developments in the last three decades. In both periods, technological advances led to not only sharp increases in productivity and dramatic reductions in prices, but also massive obsolescence and overcapacity. And much as the great M&A wave of the 1890s reduced capacity by consolidating some 1,800 companies into roughly 150, the leveraged takeovers, LBOs, and other leveraged recapitalizations of the 1980s provided “healthy adjustments” to overcapacity that was building in many sectors of the U.S. economy.

To help public companies make the necessary adjustments to overcapacity, the author urges them to consider adopting some of the features of private equity, including significant equity stakes for managers, high leverage or payouts, and the recruiting of active investors as “partners in the business.”

Number of Pages in PDF File: 18

Accepted Paper Series


Date posted: March 31, 2010  

Suggested Citation

Jensen, Michael C., The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Applied Corporate Finance, Vol. 22, No. 1, pp. 43-58, Winter 2010. Available at SSRN: http://ssrn.com/abstract=1581814 or http://dx.doi.org/10.1111/j.1745-6622.2010.00260.x

Contact Information

Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
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United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
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Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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