Stockholder, Manager, and Creditor Interests: Applications of Agency Theory
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Clifford W. Smith Jr.
Simon Graduate School of Business, University of Rochester
July 1, 1985
Theory of the Firm (Book), Vol. 1, No. 1, 2000
We review some of the recent work in agency theory that has implications for the structure of the corporation, in particular the resolution of conflicts of interest among stockholders, managers, and creditors. We analyze the nature of residual claims and the separation of management and risk bearing in the corporation. This analysis provides a theory based on trade-offs of the risk sharing and other advantages of the corporate form with its agency costs to explain the survival of the corporate form in large-scale, complex, nonfinancial activities. We then discuss the structure of corporate bond, lease, and insurance contracts, and show how agency theory can be used to analyze contractual provisions for monitoring and bonding to help control the conflicts of interest between these fixed claimholders and stockholders.
Number of Pages in PDF File: 46
Keywords: agency theory, conflicts of interest, residual claims, bond contracts, lease contracts, insurance contracts, claimholders, stockholders
Date posted: October 11, 2000 ; Last revised: February 26, 2013