Skip to main content Accessibility help
×
Home
Hostname: page-component-684899dbb8-7wlv9 Total loading time: 0.223 Render date: 2022-05-18T04:34:25.319Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "useNewApi": true }

SPECIFIC INVESTMENT AND CORPORATE LAW

Published online by Cambridge University Press:  26 October 2006

Get access

Abstract

At the close of the twentieth century, U.S. corporate scholarship was dominated by a principal-agent paradigm that assumed that shareholders were the principals or sole residual claimants in public corporations, and also assumed that corporate directors were the shareholders' agents. This approach led many corporate scholars to assume that the proper purpose of the corporation was to maximize shareholder wealth and that the chief economic problem of interest in corporate law was the “agency cost” problem of getting corporate directors to focus on this goal.

There are basic aspects of U.S. corporate law, however, that the principal-agent model cannot explain. These include directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. These corporate law “anomalies” have prompted contemporary economic and legal scholars to begin to move beyond a focus on agency costs and to pay attention to a second economic problem that arises in public corporations: the problem of protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise if shareholders try to exploit each other's specific investments or try to exploit the specific investments of creditors, employees, customers, and other groups. Board governance, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective explains many important corporate law “anomalies” that cannot be explained by the principal-agent model.

It also suggests a pressing need to revisit conventional notions of corporate purpose. Focusing on the problem of specific investment suggests that the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.

Type
Articles
Copyright
T.M.C. Asser Press 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save article to Kindle

To save this article to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

SPECIFIC INVESTMENT AND CORPORATE LAW
Available formats
×

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

SPECIFIC INVESTMENT AND CORPORATE LAW
Available formats
×

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

SPECIFIC INVESTMENT AND CORPORATE LAW
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *