Unintermediated capital markets, fund-intermediated capital markets, bank-intermediated capital markets, holding companies, multidivisional organizations, leveraged buyout associations and financial keiretsu are alternative modes of capital allocation and corporate governance. If unintermediated capital markets were perfect, the prevailing organizational variety of capital allocation and corporate governance could not be explained in efficiency terms. If capital market imperfections prevail, however, alternative modes of capital allocation and corporate governance can be explained as a response to capital market inefficiencies.
In a world of organizational imperfections, organizational efficiency is not an absolute, but a relative attribute. An organizational mode of capital allocation and corporate governance can only be labeled “efficient” in comparison with other, consequently “inefficient” modes of capital allocation and corporate governance. In a multidimensional world, alternative organizational modes possess comparative advantages and disadvantages. Hence, relative organizational efficiency is not a general, but a situational attribute. An organizational mode which is efficient in one situation may be inefficient in another.
Based on these foundations, I have developed a theoretical framework which explains the prevailing variety of alternative organizational modes of capital allocation and corporate governance in terms of comparative situational efficiency. Within this theoretical framework, investment relations between investors (savers) and firms (defined as non-separable production and marketing units) represent the basic unit of analysis. Investment relation costs are the efficiency criterion. They consist of misallocation and governance costs. Misallocation costs represent the economic disadvantages