Firm Contracts: Economic Thinking And Statistical Analysis

This paper is on the theory of firm contracts and its related statistical analysis. Based upon the existing research, three efforts have been made towards furthering the theory.1. Further clearifying the concept of firm contracts which has been introduced in various classics and other important documents, and revealing the contractual nature of the firm, As results,—The significance of the firm, when viewed as a contractual selection other thaninstitutional arrangement in general, is that it saves the transaction costs irrelevant to production activity;—The contractual nature of the firm is that a firm is essentially a nexus ofcontracts, and the special property of the firm contracts itself is that it is a contract between the human capitals and non-human capitals in a market circumstance;— The firm contracts are special because that the human capitals have special natureof the property rights, namely, human capitals are inseparable from the owner of it , therefore, the incentive mechanism becomes much important with the firm.2. In order to verify the incentive contract theory statistically, after briefing the framework of the classical principal-agent theory, some cases, though somewhat insufficient, be carefully studied, Our study shows,— While we admit that the classical principal-agent theory is of important in solvingthe problems that Chinese firms currently face, the theory, when adopted under different circumstance, must be tested;— The research (Jensen, M.C. and Murphy, KJ.,1990) Shows that althoughincentive mechanism works in general, the actually effectiveness varies with different factor, and could even become negligible sometimes;—Another research conducted by Chinese scholars and supported by the statisticaltest, indicated that the incentive does work under the double-layer return distribution contracts mechanism, with the government institution and manager as one contract, and the contract between the manager and the workers as another;— But when above model be applied to the relationship between ESOPs (EmployeeStock Ownership Plans) and CE (Corporate Efficiency), no evidence shows that ESOPs works well in enhancing CE;—All arguments above at least prove that incentive mechanism cannot be introducedsimply on assumption.3. After outlining the general theory on the corporate capital structure , detailed analysis were applied to the contractual nature of firm activities involving the bank, the M &As (mergers and acquisitions) and the taking-over of corporate control rights. Our knowledge are,------- The MM Theorem, derived from the strictly-set assumptions, laid the foundation ofthe new theory on corporate financing structure, which drew a further step towards solving the " puzzle of corporate financing structure ";------- There exists certain rule to follow in the forward evolution of the contracts,between the bank and the corporate, namely, from the reciprocal evaluation and selection to the final co-operation. The adverse selection and credit rationing could happen due to the asymmetry of information exchange between the corporate and bank. The theory on soft budget constraint and its statistical test, seems even more thought-interesting. All above indicating that the corporate and its counter-part of the game have more work to do in establishing and functioning a healthy financial contract relationship;------- The M&As can be viewed in theory as a procedure of combining two sets ofcontract in to one , the necessity and success of it subject to the ratio of gains and transaction costs, and in China, there has not been M&As in standard sense;------- Some other points relating to the firm contracts were also discussed.