Document Type
Article
Publication Date
2009
Abstract
"Separation of ownership and control" is a phrase whose history will forever be associated with Adolf A. Berle and Gardiner C. Means' The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Within that milieu the large publicly held business corporation became identified with excessive managerial power at the expense of stockholders, social irresponsibility, and internal inefficiency. Neoclassical economists both then and ever since have generally been critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, within neoclassical economics the separation of ownership and control has always been an essential element of efficient corporate governance and corporate finance. This paper explores the history of the concept of separation of ownership and control within neoclassical economics, starting with Yale economist Irving Fisher's separation theorem developed early in the twentieth century, which held that a corporation's profit function could not be derived from shareholders' utility functions; Ronald Coase's "The Nature of the Firm" (1937), which applied purely marginalist analysis to the determinants of the horizontal and vertical structure of the corporation; and then to the great corporate finance theorems of the 1950s and 1960s. These concluded that ownership and debt are nothing more than alternative, fungible sources of capital, and that a profitable stock ownership strategy involves no knowledge whatsoever about the firms in which purchasers are investing. Within this model "separation of ownership and control" actually understates the degree of separation. A better phrase would be "separation of ownership and awareness."
Keywords
Corporations, Berle and Means, Economics, Economic History, Legal History, Marginalism, Coase, Modigliani-Miller Theorem, Efficient Market, Fisher Separation Theorem Corporations, Berle and Means, Economics, Economic History, Legal History, Marginalism, Coase, Modigliani-Miller Theorem, Efficient Market, Fisher Separation Theorem
Publication Title
Virginia Business & Law Review
Repository Citation
Hovenkamp, Herbert J., "Neoclassicism and the Separation of Ownership and Control" (2009). All Faculty Scholarship. 1792.
https://scholarship.law.upenn.edu/faculty_scholarship/1792
Included in
Business Organizations Law Commons, Corporate Finance Commons, Economic History Commons, Economic Theory Commons, Industrial Organization Commons, Law and Economics Commons, Legal History Commons, Securities Law Commons
Publication Citation
4 Va. Bus. & L. Rev. 373 (2009)