What Jensen and Meckling Really Said About the Public Company
Elizabeth Pollman and Robert Thompson (eds.), Research Handbook on Corporate Purpose and Personhood
42 Pages Posted: 2 Sep 2020 Last revised: 4 Sep 2020
Date Written: August 23, 2020
Accepted views of a classic academic work can quite readily distort the original text. Michael Jensen and William Meckling’s widely cited 1976 article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” exemplifies the pattern. The article has been cited as a key inspiration for various significant governance changes affecting publicly traded firms, including moving the maximization of shareholder value to the top of the managerial priority list. Jensen and Meckling in fact had little to say about altering the corporate landscape, in substantial measure because they were favorably disposed toward the public company. This chapter canvasses the wide gap between what Jensen and Meckling supposedly said about the public company and what they actually said and explains how this discrepancy occurred.
Keywords: agency costs, nexus of contracts, corporate theory
JEL Classification: D21, G34, K22, L21, N22
Suggested Citation: Suggested Citation