The Corporation in Finance

Raghuram Rajan

No 17760, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain control rights that will allow them to be repaid. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments.

JEL-codes: G32 L22 L26 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-bec
Note: CF IO LE PR
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Citations: View citations in EconPapers (55)

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