Michael C. Jensen

Last updated
Michael C. Jensen
Born (1939-11-30) November 30, 1939 (age 79)
ResidenceU.S.
NationalityAmerican
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 chairman, professor, pastor, bishop, pope, director, president, prime minister, rabbi, emperor, or other person.

Contents

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 2015, the Rochester metropolitan area has a population of 215,884. According to the 2010 United States Census the city has a population of 106,769. The U.S. Census Bureau estimated that the 2017 population was 115,733. 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 liberal arts college in Saint Paul,  Minnesota, USA

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 2018, U.S. News & World Report ranked Macalester as 26th best liberal arts college in the United States, 16th for undergraduate teaching at a national liberal arts college, and 21st 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.

Career

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, 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 world's most prestigious universities.

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.

Research

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.

It was a 1990 Harvard Business Review article, CEO Incentives: It's Not How Much You Pay, But How [5] 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 [6] ) actively reject it, in favor of other arguments for shareholder primacy. However, recent literature (such as Rojas 2014 [7] ) 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. Over the last 20 years, stock buybacks total a few trillion dollars. [8] [ full citation needed ]

Jensen has collaborated several times with Werner Erhard. [9] The backbone of their study is an ontological/phenomenological model. [10]

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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.

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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.

The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market.

Andrei Shleifer is a Russian American economist and Professor of Economics at Harvard University, where he has taught since 1991. Shleifer was awarded the biennial John Bates Clark Medal in 1999 for his seminal works in three fields: corporate finance, the economics of financial markets, and the economics of transition.

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.

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References

  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. 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.
  6. Bad and Not So Bad Arguments for Shareholder Primacy, Social Science Research Network
  7. 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.'")
  8. Weisbenner (2004), Fenn and Liang (2001)
  9. "Werner Erhard's Scholarly Papers". Social Science Research Network. Retrieved March 4, 2013.
  10. 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.