Journal of Economic Perspectives: Vol. 12 No. 4 (Fall 1998)


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Corporate Finance, the Theory of the Firm, and Organizations

Article Citation

Bolton, Patrick, and David S. Scharfstein. 1998. "Corporate Finance, the Theory of the Firm, and Organizations." Journal of Economic Perspectives, 12(4): 95-114.

DOI: 10.1257/jep.12.4.95


Much of the modern research on firm boundaries, following Ronald Coase (1937), assumes that firms are run by owner-managers. This contrasts with the agency literature, following Adolph Berle and Gardiner Means (1932), that emphasizes the problems that arise when managers are not owners. In this paper, the authors argue that a richer theory of the firm should integrate Coase and Berle and Means. They illustrate this point by reexamining the oft-cited merger of General Motors and Fisher Body. The authors also show how linking these literatures can be used to understand one of the key roles of corporate headquarters, the allocation of capital.

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Bolton, Patrick (Princeton U)
Scharfstein, David S. (MIT and NBER)

JEL Classifications

D20: Production and Organizations: General
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
C62: Existence and Stability Conditions of Equilibrium


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