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Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure


Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

William H. Meckling


Simon School, University of Rochester (Deceased)

July 1, 1976

Michael C. Jensen, A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000
Journal of Financial Economics (JFE), Vol. 3, No. 4, 1976

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 the 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.

Note: Sadly, Dr. Meckling, Dean Emeritus of the Simon School, passed away in May 1998.

Number of Pages in PDF File: 78

Keywords: 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

JEL Classification: G31, G32

Accepted Paper Series


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Date posted: July 19, 1998 ; Last revised: May 18, 2013

Suggested Citation

Jensen, Michael C. and Meckling, William H., Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure (July 1, 1976). Michael C. Jensen, A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000; Journal of Financial Economics (JFE), Vol. 3, No. 4, 1976. Available at SSRN: http://ssrn.com/abstract=94043 or http://dx.doi.org/10.2139/ssrn.94043

Contact Information

Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
William H. Meckling
Simon School, University of Rochester (Deceased)
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