Financial markets and the political structure of the enterprise

Abstract

This paper argues that competitive financial markets disfavor democratic enterprises even assuming such enterprises suffer no allocational deficiencies. This conclusion follows from five assertions: (a) the democratic enterprise requires access to credit markets; (b) access to credit presupposes access to equity markets; (c) the democratic firm's optimal risk level is lower than that desired by stockholders; (d) the risk level assumed by the firm is costly to observe, subject to inaccurate measurement, and contractually unenforceable; and (e) the incentives required to induce stockholder-favorable risk behavior are more costly for democratic firms than for firms with stockholder-accountable management.