Entrepreneurship and Corporate Governance

This paper explores the relationship between the theory of the firm and the theory of financial markets. I begin with Mises’s claim that the defining feature of an industrialized, market economy is the use of financial markets to allocate capital among firms and among industries. This presupposes a market for the ownership and control of productive assets. Unfortunately, the Austrian theory of capital markets is relatively undeveloped. Focusing on the financial-market entrepreneur, I outline some features of an Austrian theory of corporate governance and relate them to the internal organization of the firm. I begin by reviewing the traditional, production-function theory of the firm and suggesting two alternative perspectives: that of the entrepreneur and that of the capitalist. I next discuss the Coasian or "contractual" approach to the firm and argue that it provides a useful organizing framework for Austrian research on the firm. The subsequent section proposes entrepreneurship and economic calculation as building blocks for an Austrian theory of the firm. Finally, after a brief review of capital-market behavior and the disciplinary role of takeovers, I outline four areas for Austrian research in corporate governance: firms as investments, internal capital markets, comparative corporate governance, and financiers as entrepreneurs. JEL Classifications: L22, G30 Earlier versions of this paper were presented at George Mason University’s "Seminars in Austrian Economics IV: Inside the Black Box," October 1997; the Austrian Scholars Conference 4, Auburn University, April 1998; and Copenhagen Business School’s RESPECT workshop, November 1998. I am grateful to participants at those meetings, and to Jerry Ellig, Richard Langlois, Ivo Sarjanovic, Narin Smith, and Sidney Winter, for helpful suggestions.