What Jensen and Meckling Really Said About the Public Company

Elizabeth Pollman and Robert Thompson (eds.), Research Handbook on Corporate Purpose and Personhood

University of Cambridge Faculty of Law Research Paper No. 29/2020

42 Pages Posted: 2 Sep 2020 Last revised: 4 Sep 2020

See all articles by Brian R. Cheffins

Brian R. Cheffins

University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)

Date Written: August 23, 2020

Abstract

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

Cheffins, Brian R., What Jensen and Meckling Really Said About the Public Company (August 23, 2020). Elizabeth Pollman and Robert Thompson (eds.), Research Handbook on Corporate Purpose and Personhood, University of Cambridge Faculty of Law Research Paper No. 29/2020, Available at SSRN: https://ssrn.com/abstract=3679405 or http://dx.doi.org/10.2139/ssrn.3679405

Brian R. Cheffins (Contact Author)

University of Cambridge - Faculty of Law ( email )

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European Corporate Governance Institute (ECGI)

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