Agency theory jensen and meckling 1976 stocks debt. Agency theory is concerned with the contractual relationship between two or more persons. 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. This paper integrates elements from the theory of agency, the theory of property. Let cash flow distribution 2 in the previous example have an expected value, ex2, which is lower than that of distribution 1. Managerial behavior, agency costs and ownership structure author links open overlay panel michael c. Miller and rock, 1985, and life cycle theory deangelo and deangelo, 2006. The antecedents of their work are in coase 1937, 1960. Jensen dan meckling 1976 menjelaskan hubungan keagenan sebagai agency relationship as a contract under which one or more person the principals engage another person the agent to perform some service on their behalf which involves delegating some decision making authority to. This happens because managers tend to try to give priority to private interests. The failure of jensen and meckling institute for new. Managerial behavior, agency costs and ownership structure author links open overlay panel. 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. Fligstein and freeland 1995 argue that the most efficient contract used to govern the principalagent relationship is determined by agency theory.
Jensen and meckling 1976 identify three agency costs for principals to monitor agent behaviour. Agency theory, contractual relationship, conflict of interest, agency issues, agency cost, literature. However, the origins of agency theoryas jensen and meckling acknowledge in their epigraphcan be traced to adam smith 1776 1952, who recognized that managers cannot be expected to watch over others capital with the same vigilance as their own. Jensen harvard business school email protected and william h. Background of agency theory at berle and means 1932. Managerial behavior, agency costs and ownership structure by. Agency costs of free cash flow, corporate finance, and. 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.
Jensen and meckling 1976 initiated and developed it. The agency theory of corporate governance was put forward by alchian and demsetz 1972 and jensen and meckling 1976. Their concerns were later developed by jensen and meckling 1976 into that has subsequently become known as agency theory, which has been characterized as a theory of the corporate ownership structure and the guiding framework for ownershipperformance studies. Volume 3, issue 4, october 1976, pages 305360 theory of the firm.
Agency theory description the full technique overview is available for free. Jensen, foundations of organizational strategy, harvard university press, 1998 journal of applied corporate finance, vol. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that. Professor michael jensen of the harvard business school and the late professor william meckling of the simon school of business, university of rochester wrote an influential paper in 1976 titled theory of the firm. Jensen, foundations of organizational strategy, harvard university press, 1998. Received january 1976, revised version received july 1976 this paper. Jensens and mecklings 1976 model shows that agency problems exist, when there. Meckling university of rochester 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.
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 versus stewardship theory accounting essay. Agency theory jensen and meckling 1976 free download as powerpoint presentation. Example of application audit committee vs agency theory recent example of theory background of agency theory at berle. Meckling, dean emeritus of the simon school, died in may. Managerial behavior, agency costs and ownership structure july 1, 1976.
Meckling university of rochester 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. Subscribe to this free journal for more curated articles on this topic. Agency costs of free cash flow, corporate finance, and takeovers. Jurnal theory of the firm managerial behavior, agency costs. 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. The starting point for the analysis is the agency theory by jensen and meckling 1976, which predicts that higher levels of managerial ownership structure. 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. Agency theory, contractual relationship, conflict of interest, agency issues. Managerial behavior, agency costs, and ownership structure. Nevertheless, these policies are to ensure that managers perform their duties diligently in the best interest of their principals. 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 agency costs of outside equity in this paper managerial behavior, agency costs and the ownership structure are modelled. Meckling journal of financial economics, october, 1976, v. 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. Agency costs in the view of jensen and meckling 1976 agency relationship is a contract in which the principle shareholders hire an agent manager to act on his behalf. Jensen and meckling 1976 formed a model by describing how the organization of the firm created agency costs generated by contractual arrangement, and how an optimal. Agency theory as a basis for business ethics since the publication of jensen and meckling s seminal work in 1976, agency theory has become an important part of modern financial economics. Agency costs and ownership structure the seminal contributions of jensen and meckling 1976 on agency costs have called into attention the social and. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. Agency theory as a basis for business ethics since the publication of jensen and mecklings seminal work in 1976, agency theory has become an important part of modern financial economics. Agency theory in business and management research oxford. Jurnal theory of the firm managerial behavior, agency. The failure of jensen and meckling tim oreilly in 1976, michael jensen and william meckling published a paper in the journal of financial economics that marked a change in the character of america as surely as an even more famous paper penned 200 years earlier by thomas jefferson.
Agency costs of free cash flow, corporate finance, and takeovers by michael c. Jensen corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. Jensen and meckling 1976 starting from these thoughts, there are two basic possibilities to reduce these agency costs. Unless the bonds are risk free, the risk bearing function is in. Managerial behavior, agency costs and ownership structure michael c. The notion of the agency theory is widely used in economics, finance, marketing, legal, and social sciences. Almost every introductory textbook in the field of corporate finance mentions agency theory and the existence of agency problems in its introductory chapter. Managerial behavior, agency costs and ownership structure jensen. A controloriented firm is then considered necessary under agency theory which suggests that agents will not act to take full advantage of the returns to the principal if and only if systematic selfgovernance mechanisms are implemented in the firm to protect the shareholders interest jensen and meckling, 1976. The relationship between ownership and performance.
Agency theory revolves around the issue of the agency problem and its solution. Governance, residual claims and organizational forms, harvard university press, december 2000. Introduction and summary the directors of such jointstock companies, however, being the managers rather of other peoples money than of their own, it cannot well be. Sep 27, 2014 managerial behavior, agency costs and ownership structure by. Among the many published works on agency theory, the jensen and meckling 1976 landmark paper is the most highly cited. Received january 1976, revised version received july 1976 this paper integrates elements from the theory of agency. Managerial behavior, agency costs and ownership structure jensen and meckling, jfe, 1976 about 3400. In agency theory, there is an analysed relationship that conceptualizes between shareholder principal and manager agent when there is a delegation of activity jensen and meckling, 1976. Jensen s and meckling s 1976 model shows that agency problems exist, when there.
Meckling university of rochester, rochester, ny 14627, u. Managerial behavior, agency costs and ownership structure, journal of financial economics 3 1976 305360. Jensen dan meckling 1976 menjelaskan hubungan keagenan sebagai agency relationship as a contract under which one or more person the principals engage another person the agent to perform some service on their behalf which involves delegating some decision making authority to the agent. Jesse isidor straus professor of business, emeritus, harvard business school. But if the ownermanager is free to choose the level of perquisites, f, subject. Agency cost of free cash flow, corporate finance, and takeovers. Jensen and meckling 1976 portrayed the firm as a black box, which operates to. Agency theory and stakeholder theory compared business.
However, the origins of agency theoryas jensen and meckling acknowledge in their epigraphcan be traced to adam smith 1776 1952, who recognized that managers cannot be expected to watch over others capital with the same. Specifically, principalagent theory concentrates on the ubiquitous agencyrelationship, in which one party the principal delegates work to another the agent, who performs that work in behalf of the. The payout of cash to shareholders creates major conflicts that. 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. While the literature of economics is replete with references to the theory of the firm, the material generally subsumed under that heading is not actually a theory of the firm but rather a theory of markets in which firms are important actors. Managerial behavior, agency costs and ownership structure, no journal of financial economics, v. Managerial behavior, agency costs and ownership structure jensen m. 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. The firm is a black box operated so as to meet the relevant marginal conditions with respect to inputs and outputs, thereby maximizing profits. 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. Agency theory and resolving it audit committee law of. Capital structure leverage for the firms is determined by agency costs, i.