Article Title

The Theory of the Firm: Investor Coordination Costs, Control Premiums and Capital Structure

Publication Title

Washington University Law Quarterly


In this Article, I will argue that the entire exercise of worrying about distributions among investors is more than a rent-dissipation activity. One the contrary, it has real efficiency implications that lawyers have not yet expressed to economists, although many clients may well be aware of the value of these services. I develop a taxonomy of the general conflicts that can arise among investors within a firm. I describe them as "coordination costs," because in part they involve issues of whether the preferences of multiple investors are so coordinated that the corporate actions selected are likely to be Pareto superior rather than Kaldor-Hicks efficient. Following the example of Smith and Warner, I construct two competing hypotheses, which I call the "Irrelevance Hypothesis" and the "Costly Contracting Hypothesis."