ABSTRACT
Corporate governance and the theory of the firm are two of the fastest growing topics in modern economic theory, after a long silence since the publication of the seminal works by Berle and Means (1932) and Coase (1937). Berle and Means argued that modern US corporations were so dependent upon professional managers that a managerial economy had emerged, characterised by the separation of ownership from control in corporations. The managers decided upon the running of the corporation whilst the shareholders, though they were the owners, were only entitled to receive cash flows. This leads to potential conflicts between the interests of the shareholders and those of the management.
