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Presidential Address: The Corporation in Finance



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    • *Rajan is with the University of Chicago Booth School of Business and NBER. This paper draws from many conversations I have had with my co-authors over the years, in particular, Viral Acharya, Douglas Diamond, Stewart Myers, Mitch Petersen, Henri Servaes, Jeremy Stein, Julie Wulf, and Luigi Zingales. I thank Douglas Baird, Effi Benmelech, Steve Kaplan, L̆ubos̆ Pástor, Amit Seru, Ram Shivakumar, and Rob Vishny for valuable comments on this draft and Maryam Farboodi for very helpful research assistance. I bear responsibility for all errors.


To produce significant net present value, an entrepreneur has to differentiate her enterprise from the ordinary. To take collaborators with her, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain control rights that will allow them to be repaid. A vibrant stock market helps the entrepreneur commit to these two transformations. The nature of firms and financing are intimately linked.

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