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 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.
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 less, in the management of the affairs of such a company.
1. Introduction
1.1. Motivation of the Paper
1.2 Theory of the Firm: An Empty Box?
1.3 Property Rights
1.4 Agency Costs
1.5 General Comments on the Definition of the firm
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2. The Agency Costs of Outside Equity
2.1 Overview
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3. Some unanswered questions regarding the existence of the corporate form
3.1 The question
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4. The Agency Costs of Debt
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5. A Theory of the Corporate Ownership Structure
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5.5 Determination of the Optimal Scale of the Firm
6. Qualifications and Extensions of the Analysis
6.1 Multiperiod aspects of the agency problem
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6.7 The Supply Side of the Incomplete Markets Question
7. Conclusions
References
