Jensen, Michael C. And Meckling. Agency Costs and Ownership Structure (July 1, 1976). Jensen, A THEORY OF THE FIRM. Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure Jensen and Meckling (1976) Presentation by Emma Xu and Michael Farrell.

Jensen Meckling Agency Theory Presentation Luoma • 1. Jensen, Michael C., and William Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976) 305-360.

• Background • The article’s meaning to the theory of finance and academia – Jensen & Meckling (1976) is one of the classics in the field of finance. It’s one of the most cited articles in finance, cited 37 893 times (June 2013). – It brought in a new concept “agency theory” and still today many studies in finance, corporate governance and organization theory use this theory framework. – In general, the paper is known for highlighting the conflict of interest between principals and agents. Typically, this is linked to relationship between owners and managers. – Nowadays agency theory is also criticized for it’s narrow and mostly negative view of actor relationships. • Overview • The Content of the Article: 1.

Introduction 2. The Agency Cost of Outside Equity 3. Akatsuki No Goei Game.

Some unanswered questions regarding the existence of the corporate form 4. The Agency Cost of Debt 5. A Theory of Corporate Ownership Structure 6.

Qualifications and extensions of the analysis 7. Conclusions • The Key Dilemma – Other People’s Money • Economics is just side remarks to ideas presented by Adam Smith: – The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or Iess, in the management of the affairs of such a company. – The Wealth of Nations, 1776, Cannan Edition (Modern Library, New York, 1937) p.