Managerialism versus the Property Rights Theory of the Firm

The consequences for corporate returns of the separation of ownership and control in the large publicly-held corporation are evaluated on the basis of two different theoretical schools: The managerial theories predict lower returns for manager-controlled corporations compared with owner-operated enterprises. On the other hand, the property rights theory of the firm predicts that returns for the manager-controlled corporation will not be lower, since the competitive processes in the corporate environment restrict the managers’ discretion and force them to operate efficiently. The validity of one standpoint or the other could not be clarified empirically until the mid-1970’s, since contradictory results had been obtained up to that point. Analysis of the most recent empirical work in this field shows extensive corroboration of the property rights theory. The large publicly-held corporation can thus be seen as an efficient form of enterprise, and the property rights theory of the firm can be considered the superior theory.

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