Book contents
- Frontmatter
- Contents
- Preface and Acknowledgments
- Introduction
- PART I THE THEORY OF THE FIRM
- PART II THE ENTREPRENEUR IN EQUILIBRIUM
- PART III HUMAN CAPITAL, FINANCIAL CAPITAL, AND THE ORGANIZATION OF THE FIRM
- 6 Human Capital and the Organization of the Firm
- 7 Financial Capital and the Organization of the Firm
- PART IV INTERMEDIATION BY THE FIRM
- PART V MARKET MAKING BY THE FIRM
- 12 Conclusion
- References
- Author Index
- Subject Index
7 - Financial Capital and the Organization of the Firm
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface and Acknowledgments
- Introduction
- PART I THE THEORY OF THE FIRM
- PART II THE ENTREPRENEUR IN EQUILIBRIUM
- PART III HUMAN CAPITAL, FINANCIAL CAPITAL, AND THE ORGANIZATION OF THE FIRM
- 6 Human Capital and the Organization of the Firm
- 7 Financial Capital and the Organization of the Firm
- PART IV INTERMEDIATION BY THE FIRM
- PART V MARKET MAKING BY THE FIRM
- 12 Conclusion
- References
- Author Index
- Subject Index
Summary
One of the most important economic functions of the firm is to raise financial capital. By definition, the firm is a transaction institution whose objectives are separate from those of its owners. The separation of objectives plays a critical role in raising financial capital. The firm chooses its investment policies separately from its owners' consumption and savings decisions, as the Fisher Separation Theorem shows; see Chapter 3. Because the firm's owners need not rely on the firm as a means of saving, they benefit from gains from trade in financial markets. The firm's owners are affected by the firm's decisions only through its profits so that they prefer that the firm maximize profits. The firm generates gains from trade by obtaining capital investment from investors, which generates additional profits for the firm's owners.
The purpose of this chapter is to examine how firms can enhance transaction efficiencies in financing investment. The firm provides two types of transaction efficiencies in capital investment. First, the firm provides efficiencies in its market transactions with investors. Separation of ownership and control provides liquidity to investors, who are able to buy and sell ownership shares of the firm depending on their consumption and savings objectives. Ownership shares offer both residual returns and residual control, which allows the development of a market for corporate control.
Second, the firm provides efficiencies in its management transactions within the firm. Separation of ownership and control allows the firm to benefit from delegating authority to professional managers.
- Type
- Chapter
- Information
- The Theory of the FirmMicroeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations, pp. 263 - 292Publisher: Cambridge University PressPrint publication year: 2009