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Organizational Forms and Investment Decisions

30 Pages Posted: 24 Oct 2000  

Eugene F. Fama

University of Chicago - Finance

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

This paper analyzes investment rules for various organizational forms that are distinguished by the characteristics of their residual claims. Different restrictions on residual claims lead to different decision rules. The analysis indicates that the investment decisions of open corporations, financial mutuals and nonprofits can be modeled by the value maximization rule. However, the decisions of proprietorships, partnerships, and closed corporations cannot in general be modeled by the market value rule.

Keywords: organizational forms, investment, proprietorships, partnerships, closed corporations, market value rule, residual claims, open corporations

Suggested Citation

Fama, Eugene F. and Jensen, Michael C., Organizational Forms and Investment Decisions. A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000, (Book). Available at SSRN: https://ssrn.com/abstract=173458 or http://dx.doi.org/10.2139/ssrn.173458

Eugene F. Fama

University of Chicago - Finance ( email )

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Michael C. Jensen (Contact Author)

SSRN ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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