In agency theory terms, the owners are principals and the managers are agents and there is an agency loss which is the extent to which returns to the residual claimants, the owners, fall below what they would be if the principals, the owners, exercised direct control of the corporation jensen and meckling 1976. In barzel 1982s theory of the firm, drawing on jensen and meckling 1976, the firm emerges as a means of centralising monitoring and thereby avoiding costly redundancy in that function since in a firm the responsibility for monitoring can be centralised in a way that it cannot if production is organised as a group of workers each acting. Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for. Managerial behavior, agency costs and ownership structure july 1, 1976. Building blocks of finance capital structure capital. Our base case is jensen and meckling s 1976 zero agencycost firm, where the manager is the firms sole shareholder. Agency theory the fundamental contribution of the agency cost model of the firm put forth by jensen and meckling 1976. The effects of concentrated ownership on corporate.
Commercial bank financial management pdf free download. He was also a visiting scholar at the university of bern 1976, harvard university. Managerial behavior, agency costs and ownership structure. It has also become the dominant theoretical framework for academic research on executive compensation bratton, 2005. Agency costs, risk management, and capital structure.
Capital structure and bank performance evidence from subsahara africa ebenezer bugri anarfo. Agency theory jensen and meckling 1976 free download as powerpoint presentation. A reconsideration of the jensenmeckling model of outside finance. Michael cole mike jensen born november 30, 1939 is an american economist who works in the area of financial economics. International journal of law and management determinants of capital structure. The jensen and meckling 1976, hereinafter jm theory explains. He holds the position of jesse isidor straus professor of business administration, emeritus, at harvard university.
Jensen and meckling 1976 define an agency relationship as a contract by which one or more persons the principal hire another person the agent to perform some service on their behalf, giving the agent some of their decisionmaking power. By its nature, the agency relationship is problematic if. Recent research has demonstrated that agency assumptions, which ad dress possible disparity between the interests of the owners and managers of corporations, only fit par ticular contexts and may be contingent on compet itive factors boyd, 1994, 1995. Optimal capital structure reflects both the tax advantages of debt less default costs modiglianimiller, and the agency costs resulting from asset substitution jensenmeckling. My answer to 3 is pretty incomplete, and 7 doesnt make much sense without the picture. Alexander pepper and julie gore behavioral agency theory. Managers are believed to have no option other than being efficient. However, jensen and meckling 1976 explained that managers do not always run the firm to maximise returns to the. Managerial behavior, agency costs and ownership structure agency costs of outside equity in this paper managerial behavior, agency costs and the ownership structure. A fulltext version of these instructions is available in acrobats portable data format. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. A uk perspective 25 years after jensen and meckling 1. The determinants and consequences of auditor choice in. Download this document for corporate governance at maastricht university for free and find more useful study materials for your courses.
Jensen and meckling 1976 argued that the agency problem characterizes the corporate governance choices of firms principals and the resulting behavior of ceos agents. Michael jensen made a name for himself in the 1970s1990 s with his agency theory and its application to questions of corporate governance and economic policy. Background of agency theory at berle and means 1932. In rozeffs 1982 model, an optimal dividend policy is. Pdf on the origins, meaning and influence of jensen and. Agency theory also known as the principalagent or principal agency theorymodel describes the relationship between two or more parties, in which one party, designated as the principal, engages another party, designated as the agent, to perform some task on behalf of the principal jensen and meckling, 1976. The board of directors has an important function here and in particular the relationship between the chairperson and the chief executive officer is. Survey on competence and administration of supervisory. This is because ceos seek to increase their utility at the expense of firms by withholding effort. While the literature of economics is replete with references to the theory of the firm, the material generally subsumed under that heading is not actually a theory of the firm but rather a theory of markets in which firms are important actors.
The jensen and meckling 1976 analysis of effort choice and equity finance corresponds to. While the literature of economics is replete with references to the theory of the firm. An endogenous growth model of the revenue maximizing firm is here presented. A reconsideration of the jensenmeckling model of outside. Case study 1 jenson shoes the story begins with an africanamerican man named lyndon brooks, an employee at jensen shoes. The effects of his theory were acutely felt in the pedagogics of business studies, as jensen lent his authority to combat all attempts to integrate social considerations and moral values into business education. Our base case is jensen and mecklings 1976 zero agencycost firm, where the manager is the firms sole shareholder. Between 2000 and 2009 he worked for the monitor company group, a strategyconsulting firm which became monitor deloitte in 20. Agency costs and theory, internal control systems, conflicts of interest, capital structure, internal equity, outside equity, demand for security analysis, completeness of markets, supply of claims, limited liability. In this paper we draw on recent progress in the theory of 1 property rights, 2 agency, and 3 finance to.
Q northholland publishing company theory of the firm. In this paper we draw on recent progress in the theory of 1 property rights. Pdf we provide measures of absolute and relative equity agency costs for corporations under different ownership and. The joint determination of capital structure and investment risk is examined. In 1976 michael jensen and william meckling first formulated the conception that the corporation is a nexus of contracts in their famous article the theory of the firm. The journal of online education, new york, january 2009 capital structure and ownership structure. Meckling 1922 may 15, 1998 was an american economist and professor of management and government policy and dean at the simon business school, university of rochester, working in the areas of managerial economics and the economic analysis of law, and his work received international recognition source. He joined the monitor company in 2000 as managing director of the organizational strategy practice, became senior advisor in 2007 and as of 2009 is no longer.
Managerial behavior, agency costs, and ownership structure. Jensen, jesse isidor straus professor of business administration, emeritus, joined the faculty of the harvard business school in 1985 founding what is now the negotiations, organizations and markets unit in the school. In a dynamic analysis, the maximization rule becomes the balance between the rate of marginal substitution between labor and capital and the ratio of the wage rate over the. An evening with werner erhard and michael jensen pdf file of. Meckling university of rochester abstract understanding human behavior is fundamental to understanding how organizations function, whether they are profitmaking firms, nonprofit enterprises, or government agencies. Michael cole mike jensen born november 30, 1939 is an american economist who works in. Rozeff, michael s, growth, beta and agency costs as determinants of dividend payout ratios. Building blocks of finance free download as powerpoint presentation. These findings support demsetz and lehn 1985 and contradict the agency arguments in jensen and meckling 1976, morck, shleifer, and vishny 1988 and mcconnell and servaes 1990. Pdf on feb 1, 1973, stephen a ross and others published the economic theory of. Meckling 1976 there is a conflict of interest between. Agency theory and ownership structure estimating the effect of ownership structure on firm performance economics masters thesis tuomas laiho 2011. By taking into account both principals interests in the managerial compensation structure via both equity and debtlike instruments, i.
This relationship is investigated in the study performed by the author of this paper. Recent trends have identified a shortcoming in the companys casual wear department. Time series and cross sectional properties of management. Governance, residual claims and organizational forms, harvard university press, december 2000. Managerial behavior, agency costs and ownership structure jensen and meckling, jfe, 1976. Jensen meckling agency theory presentation luoma slideshare. Scholars have highlighted a number of mechanisms that may help ensure that executives act in accordance with the interests of shareholders. Received january 1976, revised version received july 1976. Management the agent stockholderscreditors the principal the optimal firms capital structure is the one that minimizes the impact of this conflict on the firms value. Brooks is therefore reassigned under the leadership of jane kravitz, much to his dismay. Managerial behavior, agency costs and ownership structure michael c. Jensen and meckling s 1976 definition of the firm as a legal fiction which serves as a nexus for contracts between individuals sits well with the. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that higher levels of managerial ownership structure.
Furthermore, there is not strong consistent relation, linear or nonlinear, between ownership and valuation or profit. New foundations for theorizing about executive compensation alexander pepper. Rozeff 1982 pdf download this paper open pdf in browser share email add to mybriefcase. Pdf agency costs and ownership structure researchgate.
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