Michael C. Jensen

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Michael C. Jensen
Born (1939-11-30) November 30, 1939 (age 79)
Alma mater Macalester College University of Chicago
Known for Financial economics
Corporate finance
Scientific career
Fields Economics
Institutions Monitor Group 2000-
Harvard University 1985-00
University of Rochester 1967-88
Doctoral advisor Merton Miller

Michael Cole "Mike" Jensen (born November 30, 1939), an American economist, works in the area of financial economics. Between 2000 and 2009 he worked for the Monitor Company Group, [1] a strategy-consulting firm which became "Monitor Deloitte" in 2013. He holds the position of Jesse Isidor Straus Professor of Business Administration, Emeritus, at Harvard University.

Economist professional in the social science discipline of economics

An economist is a practitioner in the social science discipline of economics.

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital.

Emeritus, in its current usage, is an adjective used to designate a retired chairperson, professor, pastor, bishop, pope, director, president, prime minister, rabbi, emperor, or other person.


Early life

Born in Rochester, Minnesota, United States, [2] 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 Professor Merton Miller (1990 co-winner of the Nobel Prize in Economics).

Rochester, Minnesota City in Minnesota, United States

Rochester is a city founded in 1854 in the U.S. State of Minnesota and is the county seat of Olmsted County located on the Zumbro River's south fork in Southeast Minnesota. It is Minnesota's third-largest city and the largest city located outside the Minneapolis-St. Paul Metropolitan Statistical Area. As of 2018, the Rochester metropolitan area had a population estimated at 219,802. According to the 2010 United States Census the city had a population of 106,769. The U.S. Census Bureau estimated that the 2018 population was 116,961. It is the home of the Mayo Clinic and an IBM facility, formerly one of the company's largest. The city has long been rated as one of the best places to live in the United States by multiple publications such as Money.

Macalester College United States national historic site

Macalester College is a private liberal arts college in Saint Paul, Minnesota. Founded in 1874, Macalester is exclusively an undergraduate four-year institution and enrolled 2,174 students in the fall of 2018 from 50 U.S. states, 4 U.S territories, the District of Columbia and 97 countries. It is currently a Forbes Top 100 College, and a Forbes Top 50 School for International Students. In 2019, U.S. News & World Report ranked Macalester as tied for the 27th best liberal arts college in the United States, tied for 13th best for undergraduate teaching at a national liberal arts college, and 24th for best value at a national liberal arts college.

University of Chicago Booth School of Business graduate business school located in Chicago, Illinois, at the University of Chicago, formerly known as the University of Chicago Graduate School of Business

The University of Chicago Booth School of Business is the graduate business school of the University of Chicago in Chicago, Illinois. Booth has produced more Nobel laureates in the Economic Sciences (28) than any other school and is second only to the University of Cambridge in total. Formerly known as The University of Chicago Graduate School of Business, Chicago Booth is the second-oldest business school in the U.S., and the first such school to offer an Executive MBA program. The school was renamed in 2008 following a $300 million endowment gift to the school by alumnus David G. Booth. The school has the third-largest endowment of any business school.


Between 1967 and 1988, Jensen [3] 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. 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. In 2000, Jensen retired from academic work, retaining emeritus status at Harvard, upon assuming his position at Monitor.

University of Rochester private, nonsectarian, research university in Rochester, New York, United States

The University of Rochester is a private research university in Rochester, New York. The university grants undergraduate and graduate degrees, including doctoral and professional degrees.

Harvard Business School business school in Boston, Massachusetts

Harvard Business School (HBS) is the graduate business school of Harvard University in Boston, Massachusetts. The school offers a large full-time MBA program, management related doctoral programs, HBS Online and many executive education programs. It owns Harvard Business Publishing, which publishes business books, leadership articles, online management tools for corporate learning, case studies and the monthly Harvard Business Review. It is home to the Baker Library/Bloomberg Center.

He 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 held the chair of president of the American Finance Association. 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. Jensen is also the founder and editor of the Journal of Financial Economics .

University of Bern university in the Swiss capital of Bern

The University of Bern is a university in the Swiss capital of Bern and was founded in 1834. It is regulated and financed by the Canton of Bern. It is a comprehensive university offering a broad choice of courses and programs in eight faculties and some 150 institutes. With around 18,019 students, the University of Bern is the third biggest University in Switzerland.

Harvard University Private research university in Cambridge, Massachusetts, United States

Harvard University is a private Ivy League research university in Cambridge, Massachusetts, with about 6,700 undergraduate students and about 15,250 postgraduate students. Established in 1636 and named for its first benefactor, clergyman John Harvard, Harvard is the United States' oldest institution of higher learning. Its history, influence, and wealth have made it one of the most prestigious universities in the world.

Tuck School of Business business school

The Tuck School of Business is the graduate business school of Dartmouth College, an Ivy League research university in Hanover, New Hampshire. Founded in 1900 through a donation made by Dartmouth alumnus Edward Tuck, the Tuck School was the first institution in the world to offer a master's degree in business administration.

The Jensen Prize in corporate finance and organizations research is named in his honor.

The Jensen Prize is an annual prize given to authors with the best corporate finance and organizations research papers published in the Journal of Financial Economics. The award is named after Michael Jensen, a co-founding advisory editor of the journal.

Corporate finance area of finance dealing with the sources of funding and the capital structure of corporations

Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.


He has played an important role in the academic discussion of the capital asset pricing model, of stock options policy, and of corporate governance. He developed a method of measuring fund manager performance, the so-called Jensen's alpha.

Capital asset pricing model CAPM

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.

Corporate governance is the collection of mechanisms, processes and relations by which corporations are controlled and operated. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation and include the rules and procedures for making decisions in corporate affairs. Corporate governance is necessary because of the possibility of conflicts of interests between stakeholders, primarily between shareholders and upper management or among shareholders.

In finance, Jensen's alpha is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance index instead of a market index.

Jensen's best-known work is the 1976 paper he co-authored with William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. [4] One of the most widely cited economics papers of the last 40 years, it implied the theory of the public corporation as an ownerless entity, made up of only contractual relationships, a field pioneered by Ronald Coase.

His 1983 paper Reflections on the Corporation as a Social Invention argued that corportations' sole responsibility was to shareholder value via short-term stock price increases. [5]

It was a 1990 Harvard Business Review article, CEO Incentives: It's Not How Much You Pay, But How [6] by Jensen and Kevin J. Murphy, that prescribed executive stock options 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 legal scholars, and some (such as Stout 2002 [7] ) actively reject it, in favor of other arguments for shareholder primacy. However, recent literature (such as Rojas 2014 [8] ) builds upon Jensen's work arguing in favor of 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 a financial incentive to focus their efforts on increasing stock price. In the short run, some executives even manipulated accounting numbers (Enron, Global Crossing) to achieve the goal. NYT article 2005 In the long run, executives outsourced labor to reduce costs and then used the resulting savings to repurchase stock, thus increasing their own compensation as well as enriching shareholders. Since 2018 corporations have invested heavily in buybacks, including over $1 trillion from 2018-2019. [9] Recently, stock buybacks and shareholder primacy have come under scrutiny with leading economists and politicians citing that it has hurt workers and not resulted in corporations increasing value to consumers. [10] [11]

Jensen has collaborated several times with Werner Erhard. [12] The backbone of their study is an ontological/phenomenological model. [13]

Related Research Articles

Chief executive officer Highest-ranking corporate officer or administrator

The chief executive officer (CEO) or just chief executive (CE), is the most senior corporate, executive, or administrative officer in charge of managing an organization – especially an independent legal entity such as a company or nonprofit institution. CEOs lead a range of organizations, including public and private corporations, non-profit organizations and even some government organizations. The CEO of a corporation or company typically reports to the board of directors and is charged with maximizing the value of the entity, which may include maximizing the share price, market share, revenues or another element. In the non-profit and government sector, CEOs typically aim at achieving outcomes related to the organization's mission, such as reducing poverty, increasing literacy, etc.

Werner Erhard American author and lecturer known for founding "est"

Werner Hans Erhard is an American author and lecturer known for founding "est", which operated from 1971 to 1984. He has written and lectured on integrity, leadership, personal and organizational performance, and individual and organizational transformation.

Capital structure

Capital structure in corporate finance is the way a corporation finances its assets through some combination of equity, debt, or hybrid securities.

Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders. It became popular during the 1980s, and is particularly associated with former CEO of General Electric, Jack Welch.

An agency cost is an economic concept concerning the fee to a "principal", when the principal chooses or hires an "agent" to act on its behalf. Because the two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in its best interests.

<i>Dodge v. Ford Motor Co.</i>

Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 is a case in which the Michigan Supreme Court held that Henry Ford had to operate the Ford Motor Company in the interests of its shareholders, rather than in a charitable manner for the benefit of his employees or customers. It is often cited as affirming the principle of "shareholder primacy" in corporate America. At the same time, the case affirmed the business judgment rule, leaving Ford an extremely wide latitude about how to run the company.

Share repurchase is the re-acquisition by a company of its own stock. It represents a more flexible way of returning money to shareholders.

Stephen Bainbridge is the William D. Warren Professor of Law at UCLA, teaching courses on corporations and business law. Bainbridge graduated with an A.B. Western Maryland College, 1980; a Master of Science in Chemistry, University of Virginia, 1983; and a Juris Doctor from the University of Virginia, 1985. Bainbridge has been a law professor at UCLA since 1997.

Management is a type of labor but with a special role-coordinating the activities of inputs and carrying out the contracts agreed among inputs, all of which can be characterized as "decision making." Managers usually face disciplinary forces by making themselves irreplaceable in a way that the company would lose without them. A manager has an incentive to invest the firm's resources in assets whose value is higher under him than under the best alternative manager, even when such investments are not value-maximizing.

Executive compensation or executive pay is composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization. It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.

Friedman doctrine

The Friedman Doctrine, or Shareholder Theory, is a normative theory of business ethics advanced by economist Milton Friedman which holds that a firm's only responsibility is to its shareholders. This approach views shareholders as the economic engine of the organization and the only group to which the firm is socially responsible. As such, the goal of the firm is to maximize returns to shareholders. Friedman argues that the shareholders can then decide for themselves what social initiatives to take part in, rather than have an executive the shareholders appointed explicitly for business purposes decide for them.

Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other corporate stakeholders. A shareholder primacy approach often gives shareholders power to intercede directly and frequently in corporate decision-making, through such means as unilateral shareholder power to amend corporate charters, shareholder referenda on business decisions and regular corporate board election contests. The shareholder primacy norm was first used by courts to resolve disputes among majority and minority shareholders, and, over time, this use of the shareholder primacy norm evolved into the modern doctrine of minority shareholder oppression. James Kee writes, "If private property were truly respected, shareholder interest would be the primary, or even better, the sole purpose, of the corporation."

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Kevin James Murphy is a professor at the University of Southern California. Since 2006, Murphy has held the Kenneth L. Trefftzs Chair in Finance at the USC Marshall School of Business. He is also a Professor of Law at the USC Gould School of Law and Professor of Economics at USC's College of Letters, Arts & Science.

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William Lazonick is an economist who studies innovation and competition in the global economy.

Robert J. Jackson Jr. American lawyer and academic

Robert J. Jackson Jr. is an American lawyer and academic. He currently serves as a professor of law at New York University School of Law, where he is on public service leave. Jackson's research emphasizes the empirical study of executive compensation and corporate governance matters. On September 1, 2017, the White House announced that President Donald Trump had nominated Jackson to fill the open Democratic seat on the U.S. Securities and Exchange Commission (SEC). Jackson was unanimously approved by the Senate Banking Committee for the seat, and thereafter unanimously confirmed by the United States Senate on December 21, 2017.

Francesca Cornelli is an economist who currently serves as a Professor of Finance, Director of Private Equity and Deputy Dean of Degree Education at the London Business School. She was the first female to be a full professor at the London Business School. On February 1, 2019 she was announced as the Dean for the Northwestern University's Kellogg School of Management and will commence her term on August 1, 2019. She is succeeded by Kathleen Hagerty. She will also hold the position of Donald P. Jacobs Chair of Finance.


  1. "Michael C. Jensen". Harvard Business School. Harvard Business School. Retrieved 2015-06-12. He joined the Monitor Company in 2000 as Managing Director of the Organizational Strategy Practice, became Senior Advisor in 2007 and as of 2009 is no longer associated with Monitor.
  2. "Author page at Institute for Scientific Information". Hcr3.isiknowledge.com. Retrieved 12 December 2017.
  3. "Michael C. Jensen CV". People.hbs.edu. Retrieved 12 December 2017.
  4. Michael C. Jensen. "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" (PDF). Sfu.ca. Retrieved 12 December 2017.
  5. "The Stock-Buyback Swindle". The Atlantic. Retrieved 28 July 2019.
  6. Jensen, Michael; Murphy, Kevin (12 April 1999). "CEO Incentives: It's Not How Much You Pay, But How". Papers.ssrn.com. Retrieved 12 December 2017.
  7. Bad and Not So Bad Arguments for Shareholder Primacy, Social Science Research Network
  8. Rojas, Claudio (2014). "An Indeterminate Theory of Canadian Corporate Law". University of British Columbia Law Review. 47 (1): 59–128. SSRN   2391775 . ("[Canada's] multifaceted approach to the fiduciary duty of directors [incorporates] the basic principle within Jensen's theory of enlightened value maximization that 'we cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency.'")
  9. https://www.investors.com/news/stock-buyback-stock-market-outlook-2019/
  10. https://www.fastcompany.com/90307897/is-it-time-to-end-corporate-stock-buybacks
  11. http://rooseveltinstitute.org/ending-shareholder-primacy-corporate-governance/
  12. "Werner Erhard's Scholarly Papers". Social Science Research Network. Retrieved March 4, 2013.
  13. Creating Leaders: An Ontological/Phenomenological Model, Social Science Research Network - THE HANDBOOK FOR TEACHING LEADERSHIP, Chapter 16, Scott Snook, Nitin Nohria, Rakesh Khurana, eds., Sage Publications, 2012.