Ownership Structure, Value of the Firm, and the Bargaining Power of the Manager

Abstract

In their seminal article, Michael Jensen and William Meckling developed a theory of corporate ownership structure that took into account the trade-offs available to entrepreneur-manager between inside and outside equity and debt [5, 312]. Jensen and Meckling concentrated on principal-agent problem and agency costs that arise from introduction of outside equity into firm. This was done without any consideration of what effects such an action might have had on bargaining power of owner-manager in negotiating wages with current of firm. Several years later Masahiko Aoki [1; 2, 61-91] introduced a model of firm that emphasized its aspect as a quasi-permanent organization of stockholders and employees [1, 600]. He asserted that as a result of their association with firm, acquire skills and knowledge that, when combined with physical assets supplied by stockholders, can produce some economic gains-the so-called organizational rent. Such rents would not be possible through employment of external factors of production (such as workers that have no knowledge of workings of firm). The organizational rent can be produced only through cooperation of stockholders (supplying physical assets) and existing employees. As such, situation is tantamount to a two-person cooperative game, and question becomes, how then is organizational rent to be distributed between stockholders and employees. Aoki proposed that solution to this particular distribution problem could be accomplished by use of a bargaining process attributed to Frederik Zeuthen and John Harsanyi that leads to Nash bargaining solution. Implicit in Aoki's analysis was that all equity was outside equity. Therefore, no attention was given to how alternative ownership structures of firm affect (1) bargaining power of manager and (2) distribution of organizational rent. One could start out with an ownermanaged firm and examine distribution of organizational rent under such an ownership structure. It would then be important to understand how introduction of outside equity into firm a lt Jensen and Meckling, would affect, if at all, distribution of organizational rent.