Reframing the Firm as a Governance System: A Critical Synthesis of Transaction Costs, Capital Structure, and Agency Theory

Abstract

This paper reinterprets the firm as a governance system by critically synthesizing three foundational theoretical contributions: Ronald Coase’s theory of transaction costs, Modigliani and Miller’s capital structure paradigm, and Jensen and Meckling’s agency theory. While these frameworks have traditionally been explored in isolation, this study integrates them into a coherent perspective, highlighting how firms internalize market imperfections through governance mechanisms that coordinate transactions, align incentives, and manage risk. The paper also uncovers theoretical tensions among these approaches—particularly regarding assumptions of rationality, contractual completeness, and stakeholder scope—and argues for a more pluralistic view of the firm. A structured review of empirical research supports the idea that governance structures such as leverage, board composition, and ownership concentration are shaped by institutional environments and have measurable effects on firm behavior and performance. The paper concludes by emphasizing the need to extend classical theories to address contemporary challenges, including stakeholder governance, ESG imperatives, and digital organizational models.