Patrick Bolton

Corporate Finance, the Theory of the Firm, and Organization

Coauthor(s): David Scharfstein.

Download:

Adobe Acrobat PDF

Abstract:
In this article, we argue that the time has come to begin to integrate the Coasian view of the firm--which is concerned with the interactions between ownermanagers--and the Bede and Means perspective--which emphasizes the separation of ownership and control in most corporations. To illustrate the importance of integrating both perspectives, we will revisit the Coasian literature's favorite example of a vertical merger, the acquisition of Fisher Body by General Motors in 1926.[1] This example has been interpreted and reinterpreted by numerous authors in the Coasian literature, but all implicitly assume that each firm was run by its sole owner--that there was no separation of ownership and control. A more realistic account of the merger must recognize that General Motors was not owner-managed and that it was a large organization run by professional (non-owner) managers. The real result of the merger was that Fisher Body became part of the complex multidivisional organization called General Motors, overseen by GM's chief executive officer, Alfred P. Sloan, and his professional staff at corporate headquarters. Thus, it seems to us that to understand the effect of the merger one must understand both the complex interplay between divisional (non-owner) managers and corporate headquarters, and the relationship between corporate headquarters and outside investors. Our main point is that the firm should be understood as being comprised of (at least) two tiers of agency relationships: one between investors and corporate headquarters and the other between corporate headquarters and the divisions. This is a more subtle and complex view of the firm than is found in the literatures of Coase and Berle and Means.

Source: Journal of Economic Perspectives
Exact Citation:
Bolton, Patrick, and David Scharfstein. "Corporate Finance, the Theory of the Firm, and Organization." Journal of Economic Perspectives 12, no. 4 (Fall 1998): 95-114.
Volume: 12
Number: 4
Pages: 95-114
Date: Fall 1998