Article,
Theory of the firm: Managerial behavior, agency costs and ownership structure
J. of Financial Economics, 3 (4): 305--360 (October 1976)
DOI: 10.1016/0304-405X(76)90026-X
Abstract
This paper integrates elements from the theory of agency, the theory
of property rights and the theory of finance to develop a theory
of the ownership structure of the firm. We define the concept of
agency costs, show its relationship to the ‘separation and control’
issue, investigate the nature of the agency costs generated by the
existence of debt and outside equity, demonstrate who bears these
costs and why, and investigate the Pareto optimality of their existence.
We also provide a new definition of the firm, and show how our analysis
of the factors influencing the creation and issuance of debt and
equity claims is a special case of the supply side of the completeness
of markets problem.
The directors of such joint-stock companies, however, being the
managers rather of other people's money than of their own, it cannot
well be expected, that they should watch over it with the same anxious
vigilance with which the partners in a private copartnery frequently
watch over their own. Like the stewards of a rich man, they are apt
to consider attention to small matters as not for their master's
honour, and very easily give themselves a dispensation from having
it. Negligence and profusion, therefore, must always prevail, more
or less, in the management of the affairs of such a company. Adam
Smith, The Wealth of Nations, 1776, Cannan Edition (Modern Library,
New York, 1937) p. 700.
