Date Posted: 2006
Full text (original)
Much of recent academic writing in corporate and financial policy has been removed from the realities of either the business world or the marketplace and as a result often proposes self-defeating or harmful "solutions." Scholarly work in this area should always begin analysis with recognition of the principal aspects of a completely free and unregulated corporate system, the model for which seems to be less and less familiar to modern writers. Only by starting analysis with this picture can one properly appraise or evaluate changes that have occurred over the years as well as well as propose useful modifications.
The free-market model comprehends an unregulated system for buying and selling all securities and a completely unfettered market for private information. In addition there would be no regulation of the qualifications for or composition of a board of directors, though we should anticipate the use of a board as the most efficient device for dealing with management succession problems. However, a genuinely free market for corporate control, when "contractually" allowed, is of the essence of this model, including extreme-form hostile tender offers as the ultimate solution to the managerial agency-cost problem. Equally fundamental in this model, a free market for private information will generate accurate stock pricing, either through market-dictated public disclosure or through insider trading. This in turn guarantees more efficient functioning of the market for corporate control. Insider trading may also be selected as a profit-maximizing device to avoid many of the problems with direct public disclosure as well as to assure, by constantly integrating new information into stock prices, a better flow of relevant information to top managers.