Credit Markets and the Control of Capital

Traditional discussions of the role of capital markets have identified a numher of distinct functions which they perfonn; they allocate scarce capital among competing users and uses, ' and they provide signals to guide managers in making their investment decisions. In this lecture, I wish to focus on a rather different function of the capital market: what I shall refer to as the control of capital. Ĉonventional theory treats the typical firm in an anthropomorphic manner: it acts as a single, rational, individual dokig what it is supposed to be doing, maximizing stock market value. That may bave been well and good in those nostalgic bygone days of small firms, each ran tightly by their owners who were single-mindedly pursuing their lust for wealth. But today a majority of production occurs in large corporations, in which no shareholder owns more than a small fraction of the shares, in which the separation of ownership and control that Frank Knight was so concerned with in bis writings some sixty-five years ago has become a reality. Those