Michael Cole Jensen (November 30, 1939 – April 2, 2024) was an American economist who worked in the field of financial economics.
Until 2000, he held the position of Jesse Isidor Straus Professor of Business Administration at Harvard University.
He received both his M.B.A. (1964) and Ph.D. (1968) degrees from the University of Chicago Booth School of Business, notably working with professors Merton Miller (1990 co-winner of the Nobel Prize in Economics) and Eugene Fama (2013 co-winner of the Nobel Prize in Economics).
In 2000, Jensen retired from academic work, retaining emeritus status at Harvard, upon assuming his position at Monitor.
Jensen played an important role in the academic discussion of the capital asset pricing model, of stock options policy, and especially of corporate governance.
Jensen's best-known work is the 1976 Journal of Financial Economics article he co-authored with William H. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure".
[11] One of the most widely cited economics papers of the last 50 years,[12] it implied the theory of the public corporation as an ownerless entity, made up of only contractual relationships, a field pioneered by Ronald Coase.
[13] In 1986, Jensen published a short article, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers" in the American Economic Review[14] that sought to explain the buyout boom that was occurring.
Jensen argued that if the company substituted debt for equity financing, the managers would be forced to pay out profits as interest and principal to debtholders, and in so doing would incentivize managers to make sure that there were enough profits to meet the debt payments, and in the process increase firm value.
Prior to their publication, almost all of the academic articles on payout policy and capital structure published after 1960 used the framework introduced by Merton Miller and Franco Modigliani in their articles on these topics,[15][16] which assumed that the operating decisions of companies were not affected by payouts and capital structure.
After Jensen and Murphy (1990), Congress passed Section 162(m) of the U.S. Internal Revenue Code (1993), making it cost effective to pay executives in equity.
[21] Other companies focused on long-term value creation, even if it negatively affected short-term earnings per share (EPS).
[24] He also collaborated with Eugene Fama on two articles that were published in the 1983 Journal of Law and Economics dealing with agency problems, that is, conflicts in the goals of managers and shareholders.