A Stakeholder Rationale for Risk Management (eBook)

Dr. Gregor Gossy promovierte bei Univ.-Prof. Dr. Paul Wentges am Institut für Unternehmensführung der Wirtschaftsuniversität Wien. Er ist derzeit als Unternehmensberater bei The Boston Consulting Group tätig.

Foreword 7
Preface 8
Table of Contents 9
List of Tables 13
List of Abbreviations 14
1 Introduction 16
2 Stakeholder Theory 20
3 The Theory of the Firm 27
4 The Theory of Corporate Risk Management 47
5 Theories of Corporate Finance Decisions 82
6 Statistical methodology 131
7 Empirical study 144
8 Conclusions and suggestions for future research 177

3 The Theory of the Firm (S. 13-14)

According to Holmstrom and Tirole (1989), the theory of the firm tackles two central questions. First, why do firms exist, and second, what determines the firms` scale and scope. The theory of the firm offers a trade-off between the benefits and costs of integration to find an answer why not all economic transactions are organized within a single firm (Holmstrom and Tirole, 1989: 65–66). Departing from the irrelevance assumption of the firm in neoclassical perfect market theory, new institutional economic theory describes the boundaries of the firm within an environment of market frictions (Lockett and Thompson, 2001: 728).

In contrast to Holmstrom and Tirole (1989), Asher et al. (2005) emphasize different aspects of the theory of the firm. They point at the issues of economic value creation and the distribution of that economic value. These two points, they argue, have always been fundamental questions in the history of economic thought (Asher et al., 2005: 5). In this chapter, the theories of the firm are outlined along three of those four elementary questions. Why do firms exist? What are the firm`s boundaries?

How is value created within the firm? The issue regarding the distributional aspect of the firm`s value creation has not yet been given much research attention (Asher et al., 1995: 6) and will not be the focus of this work. Starting with neoclassic theory, the firm will later be analyzed within the framework of new institutional economics, before turning to the perspectives of Zingales (1998 and 2000) and Rajan and Zingales (1998) as well as those of the resource-based theory. The final subsection is devoted to integrating aspects from stakeholder theory, elements of new institutional theory and RBV-arguments into a stakeholder-centered conception of the modern firm.

3.1 The firm in neoclassical economic theory

Neoclassic theory treats the firm as a black box. Jensen and Meckling (1976) even denote it an empty box because the firm is simply regarded as a production function that seeks to maximize the present value of profits (Jensen and Meckling, 1976: 3). The firm is an entity into which resources go and out of which goods come. The transformational process within the firm is not subject to further analysis. The firms produce the products that are consumed by other economic entities (Demsetz, 1997: 426). Jensen and Meckling (1976) conclude that in neoclassic microeconomic theory the firm is simply an, however important, actor within a theory of markets (Jensen and Meckling, 1976: 3).

This view of the firm is maintained by holding the following very restrictive assumption: First, the markets function freely. Second, prices and technology are given and known by all parties. Third, owners are effective in controlling the use of their assets (Demsetz, 1997: 428). As a result of these assumptions, management does not play any role in the neoclassic firm (Stiglitz, 1985: 32–33, Demsetz, 1997: 428). Already Stiglitz asserts that the description of the firm in neoclassic economic theory provides an inadequate description of the modern industrial enterprise (Stiglitz, 1985: 32). This conclusion is even more relevant for a firm in the 21st century when the character of the firm shifts more and more from asset to service-based.