Optimal capital structure reflects both the tax advantages of debt less default costs modiglianimiller, and the agency costs resulting from asset substitution jensen meckling. Jensen s bestknown work is the 1976 paper he coauthored with william h. Agency costs, risk management, and capital structure. Shareholder litigation deters managerial wrongful behavior. Jensen and his coauthor, william meckling, received the first leo melamed prize for outstanding scholarship by business school teachers from the university of chicagos graduate school of business in march, 1979 for their paper, theory of the firm. The joint determination of capital structure and investment risk is examined. As such, principals will enact structural or governance mechanisms to monitor the agents behavior, intending to thwart behavior not aligned with the interest of the principal cruz et al. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that higher levels of managerial ownership. This approach assumes a principalagent problem based on selfish managerial rationality. Many possible ways exist for a firm to build its ownership, and the type of ownership structure that a firm chooses to adopt is shaped by the. The analytical approaches taken by these authors have varied as have their conclusions. Managerial overconfidence, moral hazard problems, and.
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. Many possible ways exist for a firm to build its ownership, and the. Managerial behavior, agency costs and the theory of the firm. Jensen meckling 1976 principal agent capital structure,theoryofthefirm. Managerial behavior, agency costs and ownership structure jensen and meckling, jfe, 1976 about 3400. The literature on senior executive reward is now very extensive, drawing on a variety of. Q northholland publishing company theory of the firm. By its nature, the agency relationship is problematic if the principal and the agents. One one particular issue of why this theory emerged is that the 1970s, like the 1930s, saw a steep decline. Managerial behavior, agency costs and ownership structure author links open overlay panel michael c.
Volume 3, issue 4, october 1976, pages 305360 theory of the firm. Shareholder interests will be safeguarded only where the chair of the board is. 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. Monitoring cost adalah biaya yang timbul dan ditanggung oleh principal untuk memonitor perilaku agent, yaitu untuk mengukur, mengamati, dan mengontrol perilaku agent. We retain the notion of maximizing behavior on the part of all individuals in. Agency theory is a useful framework for designing governance and controls in organisations. Teori agensi jensen dan meckling 1976 menjelaskan hubungan keagenan di dalam teori agensi agency theory bahwa perusahaan merupakan kumpulan kontrak nexus of contract antara pemilik sumber daya ekonomis principal dan manajer agent yang mengurus penggunaan dan pengendalian sumber daya tersebut. It has also become the dominant theoretical framework for academic research on executive compensation bratton, 2005. Jul 20, 2016 journal of financial economics 3 1976 305360. 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. Jensen dan meckling 1976 membagi biaya keagenan ini menjadi monitoring cost, bonding cost dan residual loss. Some empirical tests fischer black deceased michael c. In 1976, jensen and meckling provided what became the canonical account of the corporation in theory of the firm. Increasingly, researchers are recognising that managerial biases may affect corporate finance decisions.
American economic association agency costs of free cash flow, corporate finance, and takeovers authors. While theoretical analyses of corporate governance deliver counteracting mechanisms of control, the. Pdf specific and general knowledge and organizational structure. Following claessens, djankov, fan, and lang 2002, we use the controlling shareholders cash flow rights and the divergence between cash flow and control rights to proxy for the degree of incentive alignment and entrenchment effects, respectively. 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. 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. 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. Evaluating the effect of ownership structure on firm. Governance, residual claims and organizational forms, harvard university press, december 2000, journal of financial economics jfe, vol. Managerial behavior, agency costs, and ownership structure.
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. One of the more prominent agency problems were brought forward by jensens free cash flow hypothesis, developed in his paper from 1986, where he found evidence of overinvestment following large amounts of excess cash. Alchian 1969, alchian and demsetz 1972, jensen and meckling 1976, fama 1980 grossman and hart 1980 and others. The impact of internationalization on performance and. Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is relatively small for. One of the most widely cited economics papers of the last 40 years, it implied the theory of the public corporation as an ownerless entity, made up of only contractual relationships. Inside debt and corporate investment between shareholders and debtholders jensen and meckling, 1976. Agency theory and stewardship theory integrated, expanded.
Jensen and meckling 2 1976 our theory helps explain. Alexander pepper and julie gore behavioral agency theory. While the literature of economics is replete with references to the theory of the firm. 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. The logic behind this result is the same as the logic behind the results of jensen and meckling 1976 that, if the entrepreneur has not enough funds of his own, then, in a model of moral hazard with respect to effort, a firstbest outcome cannot be reached by issuing equity to outsiders, and, in a model of moral hazard with respect to risk. Received january 1976, revised version received july 1976. Limitations on the mental capacity of the human mind and the costs of. The striking insight of alchian and demsetz 1972 and jensen and. An analysis of some of the implications of these facts is contained in jensen and meckling 1978 and we shall. Jensen and meckling 1976 and shleifer and vishny 1986.
By its nature, the agency relationship is problematic if. In separation of ownership and control fama and jensen, 1983, we argue that this agency problem is 5 see, for example, fama 1978. Thus, compensation criteria that place greater emphasis on. Optimal capital structure reflects both the tax advantages of debt less default costs modiglianimiller, and the agency costs resulting from asset substitution jensenmeckling. The corporate financiers is the fifth book in a series of discussions about the great minds in the history and theory of finance. Jensen and meckling 4 1976 behavior as well as rejecting the more specific profitmaximizing model. Evidence from saudi arabian listed companies ongoing debate in the corporate finance literature abuserdaneh et al, 2010.
The key insight of jensen and meckling 1976 was to model the relationship between own ers and managers similar to one between a principal and an agent. The effects of concentrated ownership on corporate. Meckling 1976 there is a conflict of interest between. The concept offers a solid introduction to the topic by evaluating its strengths and weaknesses and uses case study evidence to demonstrate how the theory has been applied in different industries and contexts.
Managerial behavior, agency costs and ownership structure, journal of financial economics 3 1976 305360. Agency theory and ownership structure estimating the effect of ownership structure on firm performance economics masters thesis tuomas laiho 2011. A received january 1976, revised version received july. 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. Managerialbehavior,agencycostsandownershipstructuremichaelc. Managerial behavior, agency costs and ownership structure michael c. The threat of shareholder litigation mitigates concern over the moral hazard problem and might keep managers focused on innovative activities. Shareholder interests will be safeguarded only where the chair of the board is not held by the ceo or where the ceo has the. Shareholders have three alternatives to discipline management.
Meckling 1976 is in viewing the firm as a set of contracts among factors of production. Therefore, to the extent that lenders take inside debt into account when structuring debtcontracting terms e. Conversely, when the exposure to shareholder litigation is reduced, managers might abandon efforts to engage in explorative innovation search. Managerial behavior, agency costs and ownership structure july 1, 1976. However, a common starting point appears to be the observation by berle. Smith 1937 to berle and means 1932 and jensen and meckling 1976. Jensen meckling 1976 principal agent capital structure. However, jensen and meckling 1976 explained that managers do not always run the firm to maximise returns to the shareholders. Jensens bestknown work is the 1976 paper he coauthored with william h. While theoretical analyses of corporate governance deliver counteracting mechanisms of control, the empirical literature. 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. This is because ceos seek to increase their utility at the expense of firms by withholding effort. Meckling university of rochester, rochester, ny 14627, u.
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. A reconsideration of the jensenmeckling model of outside. An analysis of some of the implications of these facts is contained in jensen and meckling 1978 and we shall not pursue them here. However, a common starting point appears to be the observation by berle and means 1932 that separation of security ownership from. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that higher levels of managerial 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. Jensen and meckling 1976 argued that the agency problem characterizes the corporate governance choices of firms principals and the resulting behavior of ceos agents.
1020 1329 533 879 252 1363 911 782 1569 1393 726 253 1394 830 461 1443 1315 1127 701 1234 480 205 1079 1472 96 1409 1387 1041 1514 410 1407 206 890 494 1102 593 8 67 1440 155 68 947