Abstract and Keywords
This chapter examines the theoretical and empirical validity of the “contractarian” theory of corporate governance Beginning with an overview of the contractarian theory and its conceptualization of the relationship between managers and shareholders of a public company, it explains how the theoretical assumptions of the contractarian theory have turned out to be invalid and how the empirical predictions of the theory have not been borne out. The process by which “corporate contracts” develop do not fit the neoclassical model of atomistic competition. As a result, the customization and innovation that the contractarian theory predicts do not occur—either at the IPO stage or at the “midstream” stage when companies are publicly traded.
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