Draft Transaction Alignment and Survival : Performance Implications of Transaction Cost

There are now hundreds of empirical studies that have confirmed the main predictions of transaction cost economics regarding the alignment of transactions with governance 2001) have noted, there are very few empirical studies that demonstrate the impact of this economizing alignment on performance. Some critics of the theory have noted that in order for the theory to be of relevance to other organizational theorists – in particular strategy researchers-there must be evidence of the performance implications of getting the governance structure right from a transaction cost perspective. Both empirical and theoretical hurdles have stymied research in this area. This paper addresses the primary theoretical issues and offers a unique empirical test using an 18 year panel of the population of U.S. automobile manufacturers from 1916 to 1934. The primary finding: governance does matter. Firms that fail to organize according to transaction cost logic have a higher risk of mortality than firms that adhere to transaction cost reasoning. This paper offers evidence that, yes, getting the alignment right does have profound effects on firm performance. Misalignment has a positive effect on the likelihood of firm failure. Perhaps of even greater interest, this paper also demonstrates that the effect of misalignment varies with firm age.