Corporate finance and the theory of the firm

Corporate finance has become increasingly important in the last fifty years and has experienced
simultaneously major changes. An appropriate way to explain the reasons for
these changes is to assess how the theory of the firm can be considered as the underlying
theoretical basis for corporate finance.
This seminar paper thus examines the links between corporate finance and the theory of
the firm. As a basis for this analysis, theoretical foundations in corporate finance and
the theory of the firm are provided. Furthermore, current research on the theory of the
firm and corporate finance for the recently emerged type of firm of the human-capital
intensive firm is presented.
The most significant part of the analysis is the evaluation of the interrelation between
corporate finance and the theory of the firm using a 3x3 matrix. This matrix compares
three important theoretical frameworks of the firm (the firm as a nexus of contracts, as a
collection of growth options and as a collection of assets) with three major fields of
corporate finance (capital structure, corporate governance and valuation). This
assessment is done for the traditional asset-intensive industrial firm, one of two basic
types of firms in today’s economy. For giving an additional insight into current
research, the recently emerged human-capital intensive firm is shortly described in
comparison to the traditional asset-intensive firm, and implications for corporate finance
for this new type of firm are explained.
As a conclusion, three major results can be stated: firstly, the theory of the firm definitely
influences corporate finance for all described views of the firm, and it is thus an
important basis for corporate finance. This fact makes it necessary to consider the underlying
issue of the theory of the firm for each problem in corporate finance. Secondly,
different views of the theory of the firm have different implications for corporate finance.
For example, the appropriate valuation method depends on the considered view
of the firm. A third result being observed is that corporate finance and the theory of the
firm are in an ongoing change. An example of this is the emergence of human-capital
intensive firms within the last decade.
As future perspectives for the combined consideration of corporate finance and the theory
of the firm, the following can be mentioned: services companies and high-tech firms
will become increasingly important, and hence, the competition for human capital will
increase further. Moreover, employee ownership will gain increasingly in significance.
Nevertheless, asset-intensive industrial corporations as well as human-capital intensive
services and high-tech firms will co-exist in the future. Consequently, further research
will be performed for both types of firms, whereas the need for research will be higher
for the human-capital intensive firm.