The 'Corporate Contract' Today

Abstract

This chapter of the Oxford Handbook of Corporate Law and Governance examines the theoretical and empirical validity of the “contractarian” theory of corporate governance. Beginning with an overview of the contractarian theory and its conceptualization of the relationship between public company managers and shareholders, it explains how the theoretical assumptions of the contractarian theory have turned out to be invalid, and how the empirical predictions of the theory have not been borne out. The process by which “corporate contracts” develop do not fit the neoclassical model of atomistic competition. For this reason and others, the customization and innovation that the contractarian theory predicts do not occur — either at the IPO stage or at the “midstream” stage when companies are publicly traded.

Keywords: Corporate governance, contractarian theory, IPO stage, midstream stage, managers, shareholders, public company, corporate law, corporate charters, corporate contract

JEL Classification: G3, G30, G34