Stockholder, Manager, and Creditor Interests: Applications of Agency Theory

46 Pages Posted: 11 Oct 2000 Last revised: 26 Feb 2013

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Date Written: July 1, 1985

Abstract

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.

Keywords: agency theory, conflicts of interest, residual claims, bond contracts, lease contracts, insurance contracts, claimholders, stockholders

Suggested Citation

Jensen, Michael C. and Smith, Clifford W., Stockholder, Manager, and Creditor Interests: Applications of Agency Theory (July 1, 1985). Theory of the Firm (Book), Vol. 1, No. 1, 2000, Available at SSRN: https://ssrn.com/abstract=173461 or http://dx.doi.org/10.2139/ssrn.173461

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States

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Harvard University - Accounting & Control Unit ( email )

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Clifford W. Smith

Simon Graduate School of Business, University of Rochester ( email )

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Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

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