The agency theory of corporate governance was put forward by alchian and demsetz 1972 and jensen and meckling 1976. Managerial behavior, agency costs and ownership structure july 1, 1976. Our base case is jensen and mecklings 1976 zero agencycost firm, where the manager is the firms sole shareholder. Investors focus more on profits than management process. Meckling 1976 explained that managers do not always run the firm to maximise returns to the shareholders. The jensen and meckling 1976, hereinafter jm theory explains. Furthermore, principals cannot continuously monitor agent. He was also a visiting scholar at the university of bern 1976, harvard university.
This theory highlights the information asymmetry between management and shareholders. Managerial behavior, agency costs and ownership structure jensen and meckling, jfe, 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. Alexander pepper and julie gore behavioral agency theory. Aghion and bolton1992 andzender1991 show the value of debt in aligning incentives comes in part from the allocation of control rights. Jensen, foundations of organizational strategy, harvard university press, 1998 contract economics, pp. According to jensen and meckling 1976 agency theory states that individuals are wealth maximisers. The former bears the agency costs, as conjectured by. Smith 1937 to berle and means 1932 and jensen and meckling 1976. This paper describes new microfoundations for theorizing about executive compensation, drawing on the behavioral economics literature and based on a more realistic set of behavioral assumptions than those which have typically been made by agency theorists. In simplified terms, the theory of the firm aims to answer these questions. The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market.
Agency costs and ownership structure the seminal contributions of jensen and meckling 1976 on agency costs have called into attention the social and private costs of an agents actions due to. They argued that firms can be regarded as a nexus for a set of contracting relationships among individuals, whereas classical economics regards firms as singleproduct entities with the purpose of maximizing profit. The firm is not an individual but a legal fiction, where conflicting objectives of. Agency theory jensen and meckling 1976 stocks debt. Effects of the simultaneous holding of equity and debt by noncommercial banking institutions. Managerial behavior, agency costs and ownership structure agency costs of outside equity in this paper managerial behavior, agency costs and the ownership structure are modelled. Managerial behavior, agency costs and ownership structure, journal of financial economics 3 1976 305360. The impact of managerial ownership on the enterprise.
He holds the position of jesse isidor straus professor of business administration, emeritus, at harvard university. They also find that firms with heavier borrowing invested fewer resources in environmental. Specific and general knowledge and organizational structure. Meckling 1976 there is a conflict of interest between. Specific and general knowledge and organizational structure michael c. This has resulted in the directorate general of taxation in indonesia imposing a monitoring mechanism in the form of a tax audit in order to reduce the states losses as a result of opportunistic behavior of taxpayers. Pendahuluan dalam teori keagenan agency theory, hubungan agensi muncul ketika satu orang atau lebih principal mempekerjakan orang lain agent untuk memberikan suatu jasa dan kemudian mendelegasikan wewenang pengambilan keputusan kepada agent tersebut jensen dan meckling, 1976. One might interpret the benefits of control at high levels of managerial ownership as the degree of control that the manager has over the board.
Introduction entrenchment is defined as the extent to which managers fail to experience discipline from the full range of corporate governance and control mechanisms, including monitoring by the board, the threat of dismissal or takeover, and stock or compensation. The rise of earnings management comes from the application of the accrual base rather than cash flow that makes it easy for the management to manipulate the financial information as accruals are less observable chen et. Asset substitution, debt overhang, and optimal capital. For a 100% ownermanaged firm, agency costs of equity are zero jensen and meckling, 1976.
Agency theory suggests that capital structure decisions should be taken in order to minimize agency conflicts agency cost and thus increase the profitability of the firm. 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. Governance, residual claims and organizational forms, harvard university press, december 2000. 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. Additionally, jensen and meckling 1976 are of the view that, it is of fundamental value in corporate governance, especially with respect to the ownership of the firm by the shareholders and the directors saddled with the everyday activities of the firm. Insight of corporate governance theories wan fauziah wan yusoff 1 and idris adamu alhaji. Managerial entrenchment and capital structure decision. This paper integrates elements from the theory of agency, the theory of property rights and the theory. Income generation activities among academic staffs at.
The board of directors has an important function here and in particular the relationship between the chairperson and the chief executive officer is key tricker 1984. 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. Utilizing a sample of 1,708 small corporations from the frb nssbf database, we find evidence supporting several predictions of agency cost theory. Managerial behavior, agency costs and ownership structure agency costs of outside equity in this paper managerial behavior, agency costs and the ownership structure. When does managerial ownership affect firm performance.
Their agency theory was developed from this explanation and the principalagent problem was taken into consideration as a key factor to determine the performance of the firm. Jensen and meckling 1976 contribute to the analysis of this issue using agency theory as a theoretical framework, where they define agency relationship as an agreement by which an agent receives some power to make business decisions on behalf of the principal jensen and mecking, 1976. Agency theory as a framework for higher education governance. This means that people will only work to the best of their abilities if they consider the reward to be adequate. For a detailed discussion of these issues, see jensen and meckling 1994 and meckling 1976. Michael cole mike jensen born november 30, 1939 is an american economist who works in.
Abd rahman ahmad, faculty of technology management and business, universiti tun. Benefits of control, managerial ownership, and the stock. Investigating the relationship between environmental disclosure and a firms financial characteristics, andrikopoulos and kriklani 20 find that larger companies disclose more information about their environmental practices. Thus, higher leverage can mitigate conflicts between managers and shareholders concerning the choice of investment myers 1984. Machlup 1967, alchian and demsetz 1972 and jensen and meckling 1976. Klein 1976 takes an approach similar to the one we embark on in this paper in. An agency cost is an economic concept concerning the fee to a principal when the principal. The principle of performance pay seldom faces tough scrutiny in the corporate environment even though there has often been fierce criticism of it in the press. Between 2000 and 2009 he worked for the monitor company group, a strategyconsulting firm which became monitor deloitte in 20. Jensen meckling agency theory presentation luoma 1.
The board of directors has an important function here and in particular the relationship between the chairperson and the chief executive officer is. A received january 1976, revised version received july 1976. Business school and the late professor william meckling of the simon school of business, university of rochester wrote an influential paper in 1976 titled theory of the. Managerial behavior, agency costs and ownership structure. In separation of ownership and control fama and jensen, 1983, we argue that this agency problem is 5 see, for example, fama 1978.
The relationship between corporate social responsibility. See meckling 1976 for a discussion of the fundamental importance of the assumption of resourceful, evaluative, maximizing behavior on the part of individuals in the development of theory. Jensens bestknown work is the 1976 paper he co authored with william h. Agency theory jensen and meckling 1976 free download as powerpoint presentation. Asset substitution, debt overhang, and optimal capital structure abstract this article uses a contingentclaims valuation method to compare debt financing, investment, and risk choices of a firm adopting the secondbest strategy with those of a firm adopting the firstbest strategy. Agency theory as prophecy scholars at harvard harvard university. Stulz b, a fisher college of business, the ohio state university, 812 fisher hall, columbus, oh 43210, usa b fisher college of business, the ohio state university, 806 fisher hall, columbus, oh 43210, usa and nber article info article history. Shareholder interests will be safeguarded only where the chair of the board is not held by the ceo or where the ceo has the. Yet, when ownership and management or control of a firm are separated, as happens in modern corporations, the divergence of interest between owners and managers results in considerable. Corporate re nancing, covenants, and the agency cost of debt. We could also assume other unobservable actions, such as managers diversifying their human capital invested in the firm see amihud and lev, 1981. Remm is to be distinguished from sociological man, psychological man, and political man.
By its nature, the agency relationship is problematic if the principal and the agents. By its nature, the agency relationship is problematic if. The antecedents of their work are in coase 1937, 1960. Based on the idea that employees at any level will have diverse goals, two main agency. 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.
290 433 758 196 993 340 510 1235 845 1534 956 319 856 833 1410 75 666 1169 1103 1277 873 414 686 1306 149 465 629 449 542 173 218 972 1466 1263 1014 1016 1244 413 109 685 363 725 107