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... are becoming more common in well-managed firms.Michael C. Jensen 25 1997 invest in even more money-losing capacity—situations that illustrate vividly what I call the agency costs of free cash flow (=-=Jensen, 1986-=-a). Contracting Problems Explicit and implicit contracts in the organization can become major obstacles to efficient exit. Unionization, restrictive work rules, and lucrative employee compensation and...

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...away from under them. In other words, the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them (=-=Schumpeter, 1976-=-, p. 83). 1 In a rare finance study of exit, DeAngelo and DeAngelo (1991) analyze the retrenchment of the U.S. steel industry in the 1980s. Ghemawat and Nalebuff (1985) have an interesting paper entit...

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... rapid growth in productivity and living standards, the formation of large corporate hierarchies, overcapacity, and, eventually, closure of facilities. (See the excellent discussions of the period by =-=Chandler, 1977-=-, 1990, 1992, Lamoreaux, 1985,Michael C. Jensen 5 1997 and McCraw, 1981, 1992.) Originating in Britain in the late eighteenth century, the First Industrial Revolution—as Chandler (1990, p. 250) label...

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... of directors. 29 Shleifer and Summers (1988) seem to take the position that all implicit contracts should be enforced rigidly and never be breached.Michael C. Jensen 27 1997 As explained elsewhere (=-=Jensen, 1989-=-a, 1989b, 1991, Roe, 1990, 1991), the capital markets were relatively constrained by law and regulatory practice from about 1940 until their resurrection through hostile tender offers in the 1970s. Pr...

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...increases beginning in 1973. The Decade of the 80s: Capital Markets Provided an Early Response to the Modern Industrial Revolution The macroeconomic data for the 1980s shows major productivity gains (=-=Jensen, 1991-=-). 1981 was in fact a watershed year: Total factor productivity growth in the manufacturing sector more than doubled after 1981 from 1.4 percent per year in the period 1950 to 1981 to 3.3 percent in t...

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...(see Burnham, 1993, and DeAngelo, 1991). Part of the problem is managerial and organizational defensiveness that inhibits learning and prevents managers from changing their model of the business (see =-=Argyris, 1990-=-). Implicit contracts with unions, other employees, suppliers, and communities add to formal union barriers to change by reinforcing organizational defensiveness and inhibiting change long beyond the ...

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...nd Summers (1988) seem to take the position that all implicit contracts should be enforced rigidly and never be breached.Michael C. Jensen 27 1997 As explained elsewhere (Jensen, 1989a, 1989b, 1991, =-=Roe, 1990-=-, 1991), the capital markets were relatively constrained by law and regulatory practice from about 1940 until their resurrection through hostile tender offers in the 1970s. Prior to the 1970s capital ...

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... are becoming more common in well-managed firms.Michael C. Jensen 25 1997 invest in even more money-losing capacity—situations that illustrate vividly what I call the agency costs of free cash flow (=-=Jensen, 1986-=-a). Contracting Problems Explicit and implicit contracts in the organization can become major obstacles to efficient exit. Unionization, restrictive work rules, and lucrative employee compensation and...

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...y and living standards, the formation of large corporate hierarchies, overcapacity, and, eventually, closure of facilities. (See the excellent discussions of the period by Chandler, 1977, 1990, 1992, =-=Lamoreaux, 1985-=-,Michael C. Jensen 5 1997 and McCraw, 1981, 1992.) Originating in Britain in the late eighteenth century, the First Industrial Revolution—as Chandler (1990, p. 250) labels it—witnessed the applicatio...

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...ation and worldwide competition (often from new, more flexible, and non-union organizations), these dominant firms cannot adjust fast enough to maintain their market dominance (see Burnham, 1993, and =-=DeAngelo, 1991-=-). Part of the problem is managerial and organizational defensiveness that inhibits learning and prevents managers from changing their model of the business (see Argyris, 1990). Implicit contracts wit...

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...can be emulated in part or in total by virtually any corporation. The two have similar governance structures, and have been successful in resolving the governance problems of both slow 48 See Palepu (=-=Palepu, 1990-=-) for a review of research on LBOs, their governance changes, and their productivity effects. Kaplan and Stein (1993) show similar results in more recent data. 49 See references in footnote 45 above. ...

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...mal breach of contracts, and the bonding against opportunistic behavior that must accompany it, is an important topic that has received considerable attention in the law and economics literature (see =-=Polinsky, 1989-=-) but is deserving of more attention by organization theorists. V. The Role of the Market for Corporate Control The Four Control Forces Operating on the Corporation There are only four control forces ...

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... regulatory practice from about 1940 until their resurrection through hostile tender offers in the 1970s. Prior to the 1970s capital market discipline took place primarily through the proxy process. (=-=Pound, 1993-=-, analyzes the history of the political model of corporate control.) The legal/political/regulatory system is far too blunt an instrument to handle the problems of wasteful managerial behavior effecti...

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...y of managerial pay to performance rises, and the companies’ equity usually become nonpublicly traded (although debt is often publicly traded). The evidence of DeAngelo, DeAngelo, and Rice (DeAngelo, =-=DeAngelo et al., 1984-=-), Kaplan (1989b), Smith (1990), and others indicates that premiums to selling-firm shareholders are roughly 40 percent to 50 percent of the prebuyout market value, cash flows increase by 96 percent f...

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...its mainframe business following the revolution in the workstation and personal computer market—ironically enough a revolution that it helped launch with the invention of the RISC technology in 1974 (=-=Loomis, 1993-=-). Like GM, IBM is a high-cost producer in a market with substantial excess capacity. It too began to change its strategy significantly and removed its CEO only after reporting losses of $2.8 billion ...

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...f prosperity without any visible warning, without even a cloud the size of a man’s hand visible on the horizon, has the cloud gathered, as it were, from the center first, spreading all over the sky? (=-=Price, 1933-=-, p. 6). On July 4, 1892, the Populist Party platform adopted at the party’s first convention in Omaha reflected similar discontent and conflict: We meet in the midst of a nation brought to the verge ...

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...ogical progress in personal computers has itself been stunning. Intel’s Pentium (586) chip, introduced in 1993, has a capacity of 100 MIPS — 100 times the capacity of its 286 chip introduced in 1982 (=-=Brandt, 1993-=-). In addition, the progress of storage, printing, and other related technology has also been rapid (Christensen, 1993).Michael C. Jensen 16 1997 the industry—a force that has wracked IBM as a high-c...

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... over 50 percent from 509,000 to 252,000. 23 From 1985 to 1989 multifactor productivity in the industry increased at an annual rate of 5.3 percent compared to 1.3 percent for the period 1958 to 1989 (=-=Burnham, 1993-=-, Table 1 and p. 15). The entry of Japan and other Pacific Rim countries such as Hong Kong, Taiwan, Singapore, Thailand, Korea, Malaysia, and China into worldwide product markets has contributed to th...

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...as a capacity of 100 MIPS — 100 times the capacity of its 286 chip introduced in 1982 (Brandt, 1993). In addition, the progress of storage, printing, and other related technology has also been rapid (=-=Christensen, 1993-=-).Michael C. Jensen 16 1997 the industry—a force that has wracked IBM as a high-cost producer. A change of similar magnitude in auto production technology would have reduced the price of a $20,000 au...

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...uropean economies to open capitalist systems (at least some of which will make the transition in some form) could 23 Steel industry employment is now down to 160,000 from its peak of 600,000 in 1953 (=-=Fader, 1993-=-). 24 I am indebted to Steven Cheung for discussions on these issues. 25 Although migration will play a role it will be relatively small compared to the export of the labor in products and services. S...

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... of directors. 29 Shleifer and Summers (1988) seem to take the position that all implicit contracts should be enforced rigidly and never be breached.Michael C. Jensen 27 1997 As explained elsewhere (=-=Jensen, 1989-=-a, 1989b, 1991, Roe, 1990, 1991), the capital markets were relatively constrained by law and regulatory practice from about 1940 until their resurrection through hostile tender offers in the 1970s. Pr...

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...USTAT. 18 “In 1980 IBM’s top-of-the-line computers provided 4.5 MIPs (millions of instructions per second) for $4.5 million. By 1990, the cost of a MIP on a personal computer had dropped to $1,000…” (=-=Keene, 1991-=-, p. 110). By 1993 the price had dropped to under $100. The technological progress in personal computers has itself been stunning. Intel’s Pentium (586) chip, introduced in 1993, has a capacity of 100...

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... American Business at the expense of research, development and capital investment. This is minimizing our ability to compete in world markets and still maintain a growing standard of living at home” (=-=Lipton, 1989-=-, p. 2). On average, selling-firm shareholders in all M&A transactions in the period 1976 to 1990 were paid premiums over market value of 41 percent, 9 and total M&A transactions generated $750 billio...

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... corporate hierarchies, overcapacity, and, eventually, closure of facilities. (See the excellent discussions of the period by Chandler, 1977, 1990, 1992, Lamoreaux, 1985,Michael C. Jensen 5 1997 and =-=McCraw, 1981-=-, 1992.) Originating in Britain in the late eighteenth century, the First Industrial Revolution—as Chandler (1990, p. 250) labels it—witnessed the application of new energy sources to methods of produ...

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...y of mankind; and the possessors of these in turn despise the republic and endanger liberty. From the same prolific womb of government injustice are bred two great classes of tramps and millionaires (=-=McMurray, 1929-=-, p. 7). Technological and other developments that began in the mid-twentieth century have culminated in the past two decades in a similar situation: rapidly improving productivity, the creation of ov...

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...000 largest firms (measured by market value of equity) held 2.7 percent of his or her firm’s equity in 1991, the median holding is only 0.2 percent , and 75 percent of CEOs own less than 1.2 percent (=-=Murphy, 1992-=-). 39 Encouraging outside board members to hold substantial equity interests would provide better incentives. Stewart (1990) outlines a useful approach using levered equity purchase plans or the sale ...