Where Berle and Means went wrong: a reassessment of capital market agency and ®nancial reporting Robert Bricker a, *, Nandini Chandar b a Department of Accountancy, Weatherhead School of Management, Case Western Reserve University, 622 Enterprise Hall, Cleveland, OH 44120, USA b Department of Accounting Information Systems, Faculty of Management, Rutgers University, 94 Rockafeller Road, Piscataway, NJ 08854, USA Abstract This paper assesses the eects of Berle and Means' study of the separation of corporate ownership from control on cor- porate ®nancial reporting theory, research and policy. Their focus on shareholders and managers provided a starting point for the subsequent development of agency theory such that this relationship has come to dominate capital markets research and policy, to the virtual exclusion of parallel issues involving other parties. Berle and Means' omission of the role of investment funds led them to conclude that the separation of ownership from control problems was located between shareholders and company managers. We document the inaccuracy of this conclusion using historical and contemporary US evidence and contemporary evidence for Germany, Japan, South Africa, and Canada. In contrast to Berle and Means, we ®nd that investment fund in¯uence and control over companies is pervasive and probably a common characteristic of modern capital markets. Our analysis shows how viewing the capital markets setting from a richer, two-tier perspective involving investors, investment managers, and company managers results in quite dierent and better perspectives on ®nancial reporting issues, particularly in terms of company reporting to funds, and fund reporting to investors. Conse- quently, we suggest that our understanding of capital markets may be improved by studying and portraying more diverse types of parties and their relationships than just managers and owners. This perspective subsumes the single-tier principal- agent model and allows multiple relationships to be portrayed and studied. # 2000 Elsevier Science Ltd. All rights reserved. 1. Introduction During the past twenty-some years, agency models have been widely used to portray eco- nomic relationships between (among others) shareholders and ®rm managers. 1 In these models, ®rm managers are commonly represented as the agents of investors, while investment managers are modeled as ®nancial intermediaries who facilitate information transfers, investing and monitoring activities. 2 These basic relationships, which per- vade much theoretic and applied capital markets research in accounting and ®nance, can be traced back to the pioneering work of Berle and Means' 0361-3682/00/$ - see front matter # 2000 Elsevier Science Ltd. All rights reserved. PII: S0361-3682(99)00050-1 Accounting, Organizations and Society 25 (2000) 529±554 www.elsevier.com/locate/aos * Corresponding author Tel.: +1-216-368-5355; fax: +1- 216-368-4776. E-mail address: rjb@worldnetoh.com (R. Bricker). 1 Watts and Zimmerman (1986) can be consulted for a review of this literature. 2 For instance, Leland and Pyle (1977) and Ramakrishnan and Thakor (1984).