Specifically, agency theory is directed at the ubiquitous agency relationship, in which one party the principal delegates work to another the agent, who performs that work. Each of these groups has different interests and objectives. Agency theory revolves around the issue of the agency problem and its solution. Agency theory jensen and meckling 1976 stocks debt. Managerial behavior, agency costs and ownership structure author links open overlay panel michael c. Michael jenson and william meckling introduction and summary 1. The firm is a black box operated so as to meet the relevant marginal conditions with respect to inputs and outputs, thereby maximizing profits. A significant paper published in 1976 by michael jensen and william meckling identified elements from the theory of agency in their consideration of the theory of the firm. 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. 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 and mecklings famous article on agency costs analyzed by tero luoma. This paper integrates elements from the theory of agency, the theory of.
Simon school, university of rochester deceased date written. Capital structure leverage for the firms is determined by agency costs, i. Analisis hubungan struktur dan indeks corporate governance dengan kualitas pengungkapan. Jensen and meckling 1976 quote from adam smith 1776. 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. In this paper we draw on recent progress in the theory of 1 property rights, 2 agency, and 3 finance to develop a theory of ownership structure for the firm. These costs include 1 the costs of opportunistic behaviour by the agent such as when the agent places his own selfinterest over that of the principals, 2 the costs to the principal of monitoring the agent. 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. We define the concept of agency costs, show its relationship to the. Agency and firms ownership structure focus is on the relationship between upperlevel management and stockholders categories which overlap when the owner is the manager. Indeed, reputational concerns and career prospects can exert a disciplining effect on managers and board members. Taxpayers and tax authorities have different interests. Managerial behavior, agency costs and ownership structure.
It explains how best to organise relationships in which one party principal determines the work and which another party agent performs or makes decisions on behalf of the principal jensen and meckling, 1976. Jensen meckling agency theory presentation luoma slideshare. The jensen and meckling 1976, hereinafter jm theory explains. This paper integrates elements from the theory of agency. Managerial behavior, agency costs, and ownership structure. Contemporary applications of agency theory were advanced with the publication of theory of the firm. An agency cost is an economic concept concerning the fee to a principal an organization, person or group of persons, when the principal chooses or hires an agent to act on its behalf. The seminal papers of alchian and demstez 1972 and jensen and meckling 1976, describe the.
For a claim on the firm of 1a the outsider will pay only 1a times the value he expects the firm to have given the induced change in the behavior of the ownermanager. The striking insight of alchian and demsetz 1972 and jensen and meckling 1976 is in viewing the firm as a set of contracts among factors of production. Agency theory jensen and meckling 1976 provided an early articulation of agency theory and the principalagent problem between a shareholder and the manager who is expected to act on the shareholders behalf, but often does not. The notion of the contract is used here as a metaphor to describe the agency relationships jensen and meckling, 1976 and it is designed based on the outcome.
It describes the relationship between principalsagents and delegation of control. Jensen and meckling 1976 put forward the theory of the agency, explained that the interests of management and shareholder interests often conflict, so that conflicts can arise between them. Managerial behavior, agency costs and ownership structure jensen and meckling, jfe, 1976 about 3400. Sections 2 and 4 provide analyses of the agency costs of equity and debt respectively. 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 antecedents of their work are in coase 1937, 1960. Managerial behavior, agency costs, and ownership structure 1976, published in the journal of financial economics by financial economist michael c. Managerial behavior, agency costs and ownership structure by. The notion of the agency theory is widely used in economics, finance, marketing, legal, and social sciences. This happens because managers tend to try to give priority to private interests. 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. Managerial behavior, agency costs and ownership structure jensen, m. Volume 3, issue 4, october 1976, pages 305360 theory of the firm. Jensens and mecklings 1976 model shows that agency problems exist, when there.
Fligstein and freeland 1995 argue that the most efficient contract used to govern the principalagent relationship is determined by agency theory. 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. Managerial behavior, agency costs and ownership structure july 1, 1976. 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. Jensen and meckling 1976 refers to the costs that arise due to the use of an agent by a principal in an agency relationship as agency cost. Jensen and meckling 19 1976 owner s response to the changed incentives, the buyer will not pay 1. Managerial behavior, agency costs and ownership structure jensen and meckling 1976 presentation by emma xu and michael farrell october 12 2015. Received january 1976, revised version received july 1976 this paper integrates elements from the theory of agency. We define the concept of agency costs, show its relationship to the separation. Agency theory jensen and meckling 1976 free download as powerpoint presentation. The modern literature on the problem dates back at least to berle and means 1932. Jensen and meckling 1976 identify three agency costs for principals to monitor agent behaviour. Jensen and meckling 1976 refers to the costs that arise.
Organizations have grown to a large size because their capital requirements are greater than can be serviced by individuals. Agency theory was developed by jensen and meckling 1976. Because the two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in its the principals best interests. Jensen and meckling 1976 initiated and developed it. Managerial behavior, agency costs and ownership structure, journal of financial economics 3 1976 305360.