The Theory of Corporate Finance

Abstract

Jean Tirole has provided the profession with its first comprehensive, advanced treatment of corporate finance theory. The approach is to present a unified body of ideas, rather than competing hypotheses to explain particular phenomena. As Tirole remarks, corporate finance has seemed a disjointed field riddled with inconsistent findings. The book establishes coherence by seeing many of the key questions as agency problems, through the lens of essentially a single simple model. However, the book abstracts from a treatment of tax and corporate finance and from a treatment of fully dynamic models. Moreover, less emphasis is placed on capital market incompleteness than in other approaches. The empirical literature is used as motivation in the first two chapters, and as a selective series of findings consistent with the models’ predictions. I return to this at the end of this Review. Corporate finance as a well‐defined research field dates from the publication of the seminal papers of Modigliani and Miller (1958) and Miller and Modigliani (1961), which gave the benchmark financial policy irrelevance propositions. Much of the subsequent literature has been concerned with the implications for capital structure of corporate and personal taxes and agency costs. In the 1970s and early 1980s numerous applications of agency theory and signalling models were used to give explanations of specific features of financial policy; see for example, Jensen and Meckling (1976), Myers (1977), Ross (1977), Leland and Pyle (1977) and Myers and Majluf (1984).