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29-479: Michael Jensen may refer to: Michael C. Jensen (1939–2024), American economist Michael K. Jensen , American mechanical engineer Michael Jensen (theologian) , Australian theologian Michael Jensen (rower) , Danish lightweight rower Michael Jepsen Jensen (born 1992), Danish speedway rider Michael Aastrup Jensen (born 1976), Danish politician Michael Westergård Jensen (1916–1944), merchant and member of

58-464: A dynamic model of the corporation and theory of corporate governance. After Jensen and Murphy (1990), Congress passed Section 162(m) of the U.S. Internal Revenue Code (1993), making it cost effective to pay executives in equity. As a result, executives had increased financial incentives to focus their efforts on increasing the company's stock price. In the short run, some executives even manipulated accounting numbers ( Enron , Global Crossing ) to achieve

87-594: A fellow of the Econometric Society in 1975 and was president of the American Finance Association in 1976. He was on the faculty of the University of Chicago 's Booth School of Business from 1961 until his retirement in 1993, although he continued teaching at the school for several more years. His works formed the basis of the "Modigliani-Miller Financial Theory". He served as a public director on

116-405: A field pioneered by Ronald Coase . The paper noted that if a manager only receives a fraction of the benefits that he or she adds to the firm, the manager will not work as hard to maximize value as he or she would if 100% of the incremental benefits flowed to the manager. The paper hypothesized that an advantage of debt financing was that with a smaller amount of equity financing, a manager could own

145-466: A larger percentage of the equity, and thus have better incentives to maximize firm value. The paper also hypothesized that outside investors would be aware of these incentive effects, and thus would be willing to assign a higher valuation to a firm that had higher managerial equity ownership. His 1983 paper Reflections on the Corporation as a Social Invention argued that corporations' sole responsibility

174-509: A mechanism to incentivize executives to maximize shareholder value. The justification they gave was that shareholders were the "residual claimants" of the corporation so they had the sole right to profits. The idea that shareholders are the sole residual claimants was later challenged by some legal scholars, and some (such as Stout 2002 ) actively reject it, in favor of other arguments for shareholder primacy. However, recent literature (such as Rojas 2014 ) builds upon Jensen's work arguing in favor of

203-408: A method of measuring fund manager performance, the so-called Jensen's alpha . Based upon his 1968 University of Chicago Ph.D. dissertation, Jensen posited that fund manager abnormal performance should be based upon a fund's average return relative to how much risk it exposed investors to, and how other risky assets had done. As an example, if the annual return on the stock market was 10% in a year when

232-683: A speedy job of evaluating manuscripts. Third, he co-founded the Social Science Research Network in 1994. SSRN quickly became the leading distributor of academic working papers in many disciplines. Born in Rochester, Minnesota , United States, he received his A.B. in Economics from Macalester College in 1962. He received both his M.B.A. (1964) and Ph.D. (1968) degrees from the University of Chicago Booth School of Business , notably working with professors Merton Miller (1990 co-winner of

261-600: Is different from Wikidata All article disambiguation pages All disambiguation pages Michael C. Jensen Michael Cole Jensen (November 30, 1939 – April 2, 2024) was an American economist who worked in the field of financial economics . From 1967-1988, he was on the University of Rochester's faculty. Between 2000 and 2009 he worked for the Monitor Company Group , a strategy-consulting firm which became "Monitor Deloitte" in 2013. Until 2000, he held

290-493: Is disseminated. SSRN was founded in 1994, at a time when few people had heard of the world wide web. In 2000, Jensen retired from academic work, retaining emeritus status at Harvard, upon assuming his position at Monitor. Jensen was also a visiting scholar at the University of Bern (1976), Harvard University (1984–1985, when he joined the faculty), and the Tuck School of Business at Dartmouth College (2001–2002). In 1992, he

319-655: The Chicago Board of Trade 1983–85 and the Chicago Mercantile Exchange from 1990 until his death in Chicago on June 3, 2000. In 1993, Miller waded into the controversy surrounding $ 2 billion in trading losses by what was characterized as a rogue futures trader at a subsidiary of Metallgesellschaft , arguing in the Wall Street Journal that management of the subsidiary was to blame for panicking and liquidating

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348-572: The Nobel Prize in Economics ) and Eugene Fama (2013 co-winner of the Nobel Prize in Economics ). Between 1967 and 1988, Jensen taught finance and business administration at the William E. Simon Graduate School of Business Administration of the University of Rochester , culminating in his 1984-1988 appointment as the LaClare Professor of Finance and Business Administration. In 1974, he co-founded

377-729: The Danish resistance See also [ edit ] Mike Jensen (born 1988), Danish footballer Mike Jensen (internet pioneer) , Member of the Internet Hall of Fame [REDACTED] Topics referred to by the same term This disambiguation page lists articles about people with the same name. If an internal link led you here, you may wish to change the link to point directly to the intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=Michael_Jensen&oldid=1234575897 " Category : Human name disambiguation pages Hidden categories: Short description

406-489: The Journal of Financial Economics was published. Jensen was the primary editor until about 1990, when he stepped down, partly due to health issues. The Jensen Prize in corporate finance and organizations research at the journal is named in his honor. Jensen played an important role in the academic discussion of the capital asset pricing model , of stock options policy, and especially of corporate governance . He developed

435-499: The Journal of Financial Economics. From 1977 to 1988, he served as the founding director of the University's Managerial Economics Research Center. He joined the Harvard Business School on a half-time appointment in 1985 (dividing his time between Rochester and Harvard) before taking a full-time appointment at the latter institution in 1988. Jensen was also forward looking regarding how the internet would reshape how information

464-501: The Promarket tribute. Much of his work focused on agency problems within organizations, especially publicly traded corporations. Second, Jensen was also the co-founder and editor for many years of the Journal of Financial Economics . The journal became the top academic finance journal almost immediately after its founding. Among its policies was compensating peer reviewers (referees) for doing

493-562: The debt payments, and in the process increase firm value. Jensen's 1976 and 1986 articles are seminal corporate finance articles. Prior to their publication, almost all of the academic articles on payout policy and capital structure published after 1960 used the framework introduced by Merton Miller and Franco Modigliani in their articles on these topics, which assumed that the operating decisions of companies were not affected by payouts and capital structure. Jensen's articles, by contrast, explicitly hypothesized that these decisions did affect

522-436: The debt ratio chips fall where they will. The way in which they arrived at this conclusion made use of the "no arbitrage " argument, i.e. the premise that any state of affairs that will allow traders of any market instrument to create a riskless money machine will almost immediately disappear. They set the pattern for many arguments based on that premise in subsequent years. Miller wrote or co-authored eight books. He became

551-521: The division of tax research of the Treasury Department, and received a Ph.D. in economics from Johns Hopkins University , 1952. His first academic appointment after receiving his doctorate was Visiting Assistant Lecturer at the London School of Economics . In 1958, at Carnegie Institute of Technology (now Carnegie Mellon University ), he collaborated with his colleague Franco Modigliani on

580-456: The goal, although these firms were hardly the first companies to manipulate accounting numbers. Other companies focused on long-term value creation, even if it negatively affected short-term earnings per share (EPS). Jensen acknowledged that market prices were not always right. In 2005 he published "Agency Costs of Overvalued Equity" In Financial Management . Jensen collaborated several times with Werner Erhard . The backbone of their studies

609-418: The managers of some profitable publicly traded firms were not maximizing shareholder value because managers were overinvesting or sitting on retained earnings. Jensen argued that if the company substituted debt for equity financing, the managers would be forced to pay out profits as interest and principal to debtholders, and in so doing would incentivize managers to make sure that there were enough profits to meet

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638-416: The operating decisions. After 1986, almost all of the academic articles on these topics have adopted Jensen's framework in which operating decisions are causally affected by financial decisions (endogenous), rather than unaffected (exogenous). A 1990 Harvard Business Review article, CEO Incentives: It's Not How Much You Pay, But How by Jensen and Kevin J. Murphy , prescribed executive stock options as

667-579: The paper The Cost of Capital, Corporate Finance and the Theory of Investment . This paper urged a fundamental objection to the traditional view of corporate finance , according to which a corporation can reduce its cost of capital by finding the right debt-to-equity ratio. According to the Modigliani–Miller theorem , on the other hand, there is no right ratio, so corporate managers should seek to minimize tax liability and maximize corporate net wealth, letting

696-547: The performance of mutual funds and other investments by both academics and practitioners. Jensen's best-known work is the 1976 Journal of Financial Economics article he co-authored with William H. Meckling , "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure". One of the most widely cited economics papers of the last 50 years, it implied the theory of the public corporation as an ownerless entity, made up of only contractual relationships,

725-503: The position of Jesse Isidor Straus Professor of Business Administration at Harvard University . Jensen died in Sarasota, Florida on April 2, 2024, at the age of 84. He was one of the most influential financial economists of all time. Jensen made three major contributions, each of which have had large impacts. First, he is one of the most-cited economists of all time, with over 340,000 citations on Google Scholar as of April 2024, according to

754-434: The risk-free rate of interest, as proxied by the return on Treasury bills, was 2%, a fund that was 80% as risky as the overall market should have an expected return of 2% + 0.8 times (10%-2%), or 8.4%, based on the capital asset pricing model referred to above. If the fund had a return of 8.1%, it underperformed by 0.3% relative to its expected return. This measure became known as Jensen's alpha, and became widely used to measure

783-552: Was an ontological/phenomenological model. He also collaborated with Eugene Fama on two articles that were published in the 1983 Journal of Law and Economics dealing with agency problems, that is, conflicts in the goals of managers and shareholders. Merton Miller Miller was born in Boston, Massachusetts to Jewish parents Sylvia and Joel Miller, a housewife and attorney. He attended Harvard University as an undergraduate student. He worked during World War II as an economist in

812-595: Was president of the American Finance Association , one of four classmates from the University of Chicago that were elected president of the AFA (the others being Hans Stoll , Richard Roll , and Myron Scholes ). He became a member of the American Academy of Arts and Sciences in 1996. Since 2002, he has been a board member of the European Corporate Governance Institute . In 1974, the first issue of

841-600: Was to maximize shareholder value, based on the assumption that the stock market accurately reflected a company's value, the assumption of the efficient-market hypothesis . In 1986, Jensen published a short article, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers" in the American Economic Review that sought to explain the buyout boom that was occurring. At the time, buyouts were referred to as leveraged buyouts (LBOs) because they frequently involved high amounts of debt financing. The paper argued that

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