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The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

65 Pages Posted: 9 May 1999 Last revised: 14 Sep 2011

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

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Abstract

Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

Keywords: Productivity, technological change, excess capacity, exit, internal control systems, corporate control, R&D, research and development, industrial revolution, boards of directors, governance.

JEL Classification: D21, D23, D24, G34, L21, L22, O32

Suggested Citation

Jensen, Michael C., The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Michael C. Jensen, A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000; Journal of Finance, July 1993. Available at SSRN: https://ssrn.com/abstract=93988 or http://dx.doi.org/10.2139/ssrn.93988

Michael C. Jensen (Contact Author)

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