The Pragmatic Theory of the Firm
Journal of Applied Corporate Finance Winter 2021, 33(1): 98-110
14 Pages Posted: 10 Jun 2021
Date Written: June 9, 2021
Abstract
The pragmatic theory begins with clarity about the firm's purpose; asserts that knowledge-building proficiency is the primary determinant of a firm's long-term performance; stresses systems thinking; and connects firm performance to market valuation and shareholder returns via long-term, life-cycle track records. Firm risk is defined as obstacles to achieving the firm's purpose. Research on excess shareholder returns and intangible assets is reviewed including the benefit from focusing on a firm's knowledge-building proficiency. An historical analysis of John Deere illustrates the advantages of the pragmatic theory in understanding the connection between key strategic decisions, competitive advantage, firm's long-term financial performance, and shareholder returns.
Keywords: pragmatic theory, knowledge building, life cycle, firm risk, value creation
JEL Classification: D21, D22, D83, G12, G30, G32, G38, L2, M41, P17
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