The Emergence of the Corporate Form

45 Pages Posted: 27 Jan 2016

See all articles by Giuseppe Dari‐Mattiacci

Giuseppe Dari‐Mattiacci

University of Amsterdam; Tinbergen Institute

Oscar Gelderblom

Utrecht University

Joost Jonker

Utrecht University

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)

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Date Written: January 2016

Abstract

We describe how the business corporation gradually emerged in the 17th century in response to the need to lock in long-term capital to profit from trade opportunities with Asia. Since contractual commitments to lock in capital were not fully enforceable in partnerships, this evolution required a legal innovation, essentially granting the corporation a property right over capital. Locked-in capital exposed investors to a significant loss of control, and could only emerge where and when political institutions limited the risk of expropriation. The Dutch East India Company (VOC, chartered in 1602) benefited from the restrained executive power of the Dutch Republic and was the first business corporation with permanent capital. The English East India Company (EIC, chartered in 1600) kept the traditional cycle of liquidation and refinancing until, in 1657, the English Civil War put the crown under strong parliamentary control. We show how the time advantage in the organizational form had a profound effect on the ability of the two companies to make long-term investments and consequently on their relative performance, ensuring a Dutch head start in Asian trade that persisted for two centuries. We also show how other features of the corporate form emerged progressively once the capital became permanent.

Keywords: capital lock in, corporate form, institutional development, legal innovation, limited liability

JEL Classification: G30, K22, N24

Suggested Citation

Dari-Mattiacci, Giuseppe and Gelderblom, Oscar and Jonker, Joost and Perotti, Enrico C., The Emergence of the Corporate Form (January 2016). CEPR Discussion Paper No. DP11062, Available at SSRN: https://ssrn.com/abstract=2723323

Giuseppe Dari-Mattiacci (Contact Author)

University of Amsterdam ( email )

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Amsterdam, Noord-Holland 1001 ND
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Tinbergen Institute ( email )

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Oscar Gelderblom

Utrecht University ( email )

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Joost Jonker

Utrecht University ( email )

Vredenburg 138
Utrecht, 3511 BG
Netherlands

Enrico C. Perotti

University of Amsterdam - Finance Group ( email )

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Amsterdam, 1018 TV
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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