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  • 04 - JensenMeckling1976

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    PhilippeBourghardt
    32 vizualizări19 pagini
    This document summarizes the seminal 1976 paper "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" by Michael C. Jensen and William H. Meckling. The paper introduced the concept of agency costs that arise due to conflicts of interest between managers and shareholders. It explained how ownership structure and capital structure are influenced by the need to minimize these agency costs. The paper had a significant influence, with over 500,000 Google search hits, more than other influential papers. It established agency theory as a central concept in corporate finance.

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    This document summarizes the seminal 1976 paper "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" by Michael C. Jensen and William H. Meckling. The paper introduced the concept of agency costs that arise due to conflicts of interest between managers and shareholders. It explained how ownership structure and capital structure are influenced by the need to minimize these agency costs. The paper had a significant influence, with over 500,000 Google search hits, more than other influential papers. It established agency theory as a central concept in corporate finance.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    32 vizualizări19 pagini

    04 - JensenMeckling1976

    Încărcat de

    PhilippeBourghardt
    This document summarizes the seminal 1976 paper "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" by Michael C. Jensen and William H. Meckling. The paper introduced the concept of agency costs that arise due to conflicts of interest between managers and shareholders. It explained how ownership structure and capital structure are influenced by the need to minimize these agency costs. The paper had a significant influence, with over 500,000 Google search hits, more than other influential papers. It established agency theory as a central concept in corporate finance.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    din 19

    CorporateFinance:

    MichaelC.Jensen&WilliamH.Meckling
    (JFE1976):
    TheoryoftheFirm:ManagerialBehavior,Agency
    CostsandOwnershipStructure
    KenL.Bechmann
    DepartmentofFinance,CBS
    October29,2014
    1

    Primaryfocus
    Toexplainbothownershipandcapital
    structuretakingagencyproblems/conflicts
    andthetheoryofpropertyrightsintoaccount

    Maincontributions (intheir own words)

    Quiteaninfluentialpaper
    EvidencefromGooglelateMondayevening!
    Jensen&Meckling 1976: 521.000hits
    Miller1977:
    201.000hits
    Black&Scholes1973:
    178.000hits

    (notethesearchalsoincludedthetitleand
    journalofthepaper).

    Mainproblem
    Anagencyrelationshipisacontractunderwhich
    oneormorepersons(theprincipal(s))engage
    anotherperson(theagent)toperformsome
    serviceontheirbehalfwhichinvolvesdelegating
    somedecisionmakingauthoritytotheagent.
    Ifbothpartiestotherelationshipareutility
    maximizers thereisgoodreasontobelievethat
    theagentwillnotalwaysactinthebestinterests
    oftheprincipal.
    5

    Consequencesofagencyproblems
    Attemptstolimitdivergenceby
    Appropriateincentives
    Monitoring
    Bonding
    Agencycostsarethesumof
    Incentivescosts
    Monitoringcosts
    Bondingcosts
    Residualloss
    6

    100%ownerofequity
    A100%ownerwillmaximizeexpectedutilityof:
    Pecuniaryreturns,Privatebenefits andEffort

    100%ownerofequity
    x*:Optimumiftheownermanageronly
    valuespecuniaryreturns.However,x>x* has
    valuetotheownermanagerduetoprivate
    benefits.Thecostsofprovidingtheadditional
    privatebenefitsmaybedefinedby

    100%ownerofequity:
    OptimumatpointDwithfirmvalueV*andbenefitsF*

    Theagencycostsofoutsideequity
    Nowsupposetheownermanagersells1 of
    thesharesandkeeps.
    Canthesharesbesoldfor(1)V*?
    NO,becausethentheoptimumwouldbein
    pointAinfigure1andthefirmvaluewould
    onlybeV0 whichwouldbeanticipatedbythe
    outsideshareholders.

    10

    Theagencycostsofoutsideequity
    Outsideshareholderswillonlytradeatafairprice
    (expostoptimal).ThisisVinfigure1.
    Wenotethat:
    Theownermanagerisworseoffwith<1.
    Theownermanagergetsadditionalprivatebenefits
    FF*.
    TheresiduallossisV*V.

    Inthiscasewithoutanyadvantagesof
    diversification,theownermanagerwillfindit
    optimaltomaintainfullownershipifhecan!
    11

    Theoptimalscaleofthefirm
    IftheownermanagerinvestsI inthefirmandhas
    F=0 histotalwealthwillbe:

    W (V ( I ) I )

    1. Infigure2,iftheownermanagerhasenough
    wealth(W I*),hecanchoosethefirstbestlevelof
    investment,I*,andprivatebenefitsF*,andwillbea
    100%owner(pointC).
    2. AssumenowthatW=I1 < I* andtherefore,hewill
    needtosell1 oftheshares.Thisgivespossible
    pointslikeZEDHL.
    12

    Theoptimalscaleofthefirm

    13

    Theoptimalscaleofthefirm
    HerepointDistheoptimalpoint:
    TheownermanagerisbetteroffatpointDthanat
    pointZ.
    PointDisinferiorcomparedtopointC
    Ameasuresthegrossagencycosts=(V*I*)(VI)>0
    Canprovethat:I<I*

    14

    Monitoring/Bonding
    TheadditionalcurveBCEinfigure3comparedto
    figure1 representsmonitoring/bonding
    opportunities.
    Ifnomonitoring/bonding,thesolutionisV,F.
    F(M, ) isthemaximalprivatebenefitsthatthe
    ownermanagercanconsumeifthelevelof
    monitoring/bondingisM given.WeassumeFM<0
    andFMM >0.
    Effectively,thecostofmonitoring/bondingwillbe
    paidbytheownermanager(becausethevalueof
    thefirmwillbecorrectlyanticipated).
    15

    Monitoring/Bonding

    16

    Monitoring/Bonding
    HerepointCistheoptimalpoint:
    TheownermanagerisbetteroffatpointCthanat
    pointBi.e.hehasanincentivetopaythecostsof
    monitoring/bonding!

    17

    Thepapercontainsseveralotherresults,butthemain
    contributionisthediscussionofagencycosts.
    Interestinglyenough,theconclusioninthepaperis:

    18

    Relevancetoday
    Usedinmanycasetoexplainvarioushot
    aspectsofcorporatefinance:
    Incentivebasedcompensation
    PrivateEquity
    Theimportanceofreputationforaccountingfirms
    Thevalueoflargeshareholders andtherelation
    todualclasssharesandrestrictionsonvoting
    rights

    19

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