The misapplication of Mr. Michael Jensen: How agency theory brought down the economy and why it might again

Frank Dobbin, Jiwook Jung

Research output: Contribution to journalArticle

Abstract

Agency theorists diagnosed the economic malaise of the 1970s as the result of executive obsession with corporate stability over profitability. Management swallowed many of the pills agency theorists prescribed to increase entrepreneurialism and risk-taking; stock options, dediversification, debt financing, and outsider board members. Management did not swallow the pills prescribed to moderate risk: executive equity holding and independent boards. Thus, in practice, the remedy heightened corporate risk-taking without imposing constraints. Both recessions of the new millennium can be traced directly to these changes in strategy. To date, regulators have proposed nothing to undo the perverse incentives of the new "shareholder value" system.

Original languageEnglish (US)
Pages (from-to)29-64
Number of pages36
JournalResearch in the Sociology of Organizations
Volume30
Issue numberPART B
StatePublished - Dec 1 2010
Externally publishedYes

ASJC Scopus subject areas

  • Sociology and Political Science
  • Organizational Behavior and Human Resource Management

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