Theories of the firm

Coase (1937) was one of the first scholars who asked why firms exist and what precisely a firm was. Both questions are fundamental to understand corporate governance. Before the 1930s the firm was often seen as a “black box” which was assumed to behave like any other self-interested utility maximizing economic actor. Although Adam Smith already cited the problems like the separation of ownership and control in firms, it took more than 150 years before economists such as Coase and Williamson put theories around these questions. In the meantime catchwords like agency theory, corporate social responsibility and corporate governance made this research area very prominent. This chapter examines the different theories of the firm, legal and economic ones, how they are connected and what they mean for the corporate governance discussion. But this chapter shall also show the limitations of these theories and present some outlook for new theories of the firm.