This book examines the links between corporate finance and the theory of
the firm. As a basis for this analysis, theoretical foundations in corporate finance and
the theory of the firm are provided. Furthermore, current research on the theory of the
firm and corporate finance for the recently emerged type of firm of the human-capital
intensive firm is presented.
The most significant part of the analysis is the evaluation of the interrelation between
corporate finance and the theory of the firm using a 3x3 matrix. This matrix compares
three important theoretical frameworks of the firm (the firm as a nexus of contracts, as a
collection of growth options and as a collection of assets) with three major fields of
corporate finance (capital structure, corporate governance and valuation). This
assessment is done for the traditional asset-intensive industrial firm, one of two basic
types of firms in today’s economy. For giving an additional insight into current
research, the recently emerged human-capital intensive firm is shortly described in
comparison to the traditional asset-intensive firm, and implications for corporate finance
for this new type of firm are explained.
As a conclusion, three major results can be stated: firstly, the theory of the firm definitely
influences corporate finance for all described views of the firm, and it is thus an
important basis for corporate finance. This fact makes it necessary to consider the underlying
issue of the theory of the firm for each problem in corporate finance. Secondly,
different views of the theory of the firm have different implications for corporate finance.
For example, the appropriate valuation method depends on the considered view
of the firm. A third result being observed is that corporate finance and the theory of the
firm are in an ongoing change. An example of this is the emergence of human-capital
intensive firms within the last decade.
Table of Contents
1 INTRODUCTION
1.1 PROBLEM AND OBJECTIVE
1.2 STRUCTURE OF THE PAPER
2 THEORY OF CORPORATE FINANCE
2.1 DEFINITION AND SCOPE OF CORPORATE FINANCE
2.2 OBJECTIVE OF CORPORATE FINANCE
2.3 FUNDAMENTAL ELEMENTS OF CORPORATE FINANCE
3 THEORY OF THE FIRM
3.1 DEFINITION AND EMERGENCE OF THE THEORY OF THE FIRM
3.2 REASONS FOR THE EXISTENCE OF THE FIRM
3.3 DIFFERENT THEORETICAL FRAMEWORKS OF THE FIRM
4 LINKS BETWEEN CORPORATE FINANCE AND THE THEORY OF THE FIRM
4.1 SOURCES OF CONNECTION BETWEEN CORPORATE FINANCE AND THE THEORY OF THE FIRM
4.2 EXPLANATION OF THE LINKS BETWEEN CORPORATE FINANCE AND THE THEORY OF THE FIRM ALONG THREE THEORETICAL FRAMEWORKS
4.2.1 The Firm as a Nexus of Contracts
4.2.2 The Firm as a Collection of Growth Options
4.2.3 The Firm as a Collection of Assets
5 THE HUMAN-CAPITAL INTENSIVE FIRM: THE NEW TYPE OF FIRM AND ITS IMPLICATIONS FOR CORPORATE FINANCE
5.1 EMERGENCE AND COMPARATIVE DESCRIPTION OF THE HUMAN-CAPITAL INTENSIVE FIRM
5.2 IMPLICATIONS FOR CORPORATE FINANCE
6 SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS
Objectives and Scope
This seminar paper explores the theoretical interconnection between corporate finance and the theory of the firm. Its central objective is to determine how the theory of the firm serves as a foundational basis for corporate finance decisions and to analyze how these relationships evolve, particularly with the emergence of human-capital intensive enterprises.
- Theoretical foundations of corporate finance and the theory of the firm.
- Evaluation of links between corporate finance and the theory of the firm using a 3x3 matrix.
- Frameworks including the firm as a nexus of contracts, a collection of growth options, and a collection of assets.
- Comparative analysis of traditional asset-intensive firms versus human-capital intensive firms.
- Implications for future corporate finance research and practices.
Excerpt from the Book
3.1 Definition and Emergence of the Theory of the Firm
According to Foss, the term theory of the firm can be understood as the research considering “the existence, the boundaries and the internal organization of the firm”37. Whereas economists have examined the firm’s market behaviour for a long time, the theory of the firm has only been covered for a relatively short period of time. 38 Nevertheless, the theory of the firm has become over time one of the two most important building blocks in microeconomic theory together with the theory of consumer behaviour.39 Before that, the firm was considered a black box that adapts itself passively to market conditions and whose internal structure is unknown.40 The theory of the firm has its major roots in transaction cost theory and in agency theory.41
Since the theory of the firm has no systematic overall framework, one has to orientate at the research papers of its most important representatives for getting an overview of this field of research.42 These important papers are the following: firstly Coase’s “The Nature of the Firm” (1937), continuing with “Production, Information Costs and Economic Organization” from Alchian/ Demsetz (1972), a further important paper was “The Costs and Benefits of Ownership: A Theory of Vertical Integration” from Grossman/ Hart (1986), and finally today’s research work of Williamson, the currently best known researcher in the field of the theory of the firm.43 These papers as well as other significant research work of this field are used for explaining the reasons for the existence of firms and for describing the most important theoretical frameworks of the firm in the following two subchapters.
Summary of Chapters
1 INTRODUCTION: This chapter outlines the growing importance of corporate finance, states the problem of linking it to the theory of the firm, and describes the structure of the paper.
2 THEORY OF CORPORATE FINANCE: This chapter establishes the theoretical foundations of corporate finance, including its definitions, scope, objective functions, and fundamental elements.
3 THEORY OF THE FIRM: This chapter defines the theory of the firm, discusses its historical emergence, explains reasons for firm existence, and presents three key theoretical frameworks.
4 LINKS BETWEEN CORPORATE FINANCE AND THE THEORY OF THE FIRM: This chapter provides a detailed analysis of how corporate finance connects to the theory of the firm across three specific organizational frameworks.
5 THE HUMAN-CAPITAL INTENSIVE FIRM: THE NEW TYPE OF FIRM AND ITS IMPLICATIONS FOR CORPORATE FINANCE: This chapter contrasts traditional asset-intensive firms with modern human-capital intensive firms and addresses the resulting implications for financial management.
6 SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS: This final chapter synthesizes the findings and provides an outlook on future perspectives for the co-existence of different firm types.
Keywords
Corporate finance, theory of the firm, human-capital intensive firm, capital structure, corporate governance, valuation, nexus of contracts, growth options, asset ownership, transaction cost theory, agency theory, real options approach, stakeholder, firm value, economic organization.
Frequently Asked Questions
What is the core focus of this seminar paper?
The paper fundamentally investigates the interrelation between corporate finance and the theory of the firm, assessing how the latter provides a necessary theoretical foundation for financial decision-making.
What are the central thematic fields covered?
The work focuses on three pillars of corporate finance—capital structure, corporate governance, and valuation—and evaluates them through distinct lenses such as the firm as a nexus of contracts, growth options, and a collection of assets.
What is the primary objective of this research?
The primary objective is to analyze the links between corporate finance and the theory of the firm to understand the determinants of recent shifts in corporate practices, such as the emergence of human-capital intensive firms.
Which scientific methods were utilized?
The author employs a comparative analytical approach, utilizing a 3x3 matrix to systematically map theoretical frameworks of the firm against major fields of corporate finance.
What is discussed in the main body of the paper?
The main body provides theoretical foundations for both disciplines, details the connections between them, and explores the specific challenges and implications that human-capital intensive firms pose for traditional financial models.
Which keywords characterize the work?
Key terms include Corporate finance, Theory of the firm, Human-capital intensive firm, Capital structure, Corporate governance, Valuation, and Nexus of contracts.
How does the firm as a "nexus of contracts" affect valuation?
Under this view, because the company is considered a set of contractual relationships, a pure DCF (discounted cash flow) valuation method is typically used to calculate firm value based on returns to shareholders.
Why is the "real options approach" relevant for human-capital intensive firms?
Because these firms possess few fixed assets and rely heavily on strategic human capital, traditional DCF methods often fail to capture value; the real options approach allows for the quantification of future management decisions and growth opportunities.
- Quote paper
- Stefan Detscher (Author), 2003, Corporate finance and the theory of the firm, Munich, GRIN Verlag, https://www.grin.com/document/24441
