A Political Theory of American Corporate Finance

58 Pages Posted: 8 Feb 2015

Date Written: 1991

Abstract

Why is the public corporation-with its fragmented shareholders buying and selling on the stock exchange-the dominant form of enterprise in the United States? Since Berle and Means, the conventional corporate law story begins with technology dictating large enterprises with capital needs so great that even a few wealthy individuals cannot provide enough. These enterprises consequently must draw capital from many dispersed shareholders. Shareholders diversify their own holdings, further fragmenting ownership. This combination of a huge enterprise, concentrated management, and dispersed, diversified stockholders shifts corporate control from shareholders to managers. Managers can pursue their own agenda, at times to the detriment of the enterprise.

In the classic story, the large public firm survived because it best balanced the problems of managerial control, risk sharing, and capital needs. In a Darwinian evolution, the large public firm mitigated the managerial agency problems with a board of directors of outsiders, with a managerial headquarters of strategic planners overseeing the operating divisions, and with managerial incentive compensation. Hostile takeovers, proxy contests, and the threat of each further disciplined managers. Fragmented ownership survived because public firms adapted. They solved enough of the governance problems created by the large unwieldy structures needed to meet the huge capital needs of modern technology. In the conventional story, the large public firm evolved as the efficient response to the economics of organization.

Keywords: Berle-Means; public corporation; strong managers, weak owners; populism; Glass-Steagall.

Suggested Citation

Roe, Mark J., A Political Theory of American Corporate Finance (1991). 91 Columbia Law Review 10 (1991). Available at SSRN: https://ssrn.com/abstract=2561487

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
242
Abstract Views
843
rank
126,332
PlumX Metrics