1、Theory Of The Firm: Managerial Behavior, Agency Costs And Ownership Structure.,Michael C. Jensen and William H. Meckling Received January 1976, revised version received July 1976,U892621 彭智誠 U892643 李易政 U892662 湯毅鋒,Journal of Financial Economics,Outline,Introduction Assumption Agency cost on equity
2、Agency cost on debt Corporate ownership structure Qualifications and extensions of the analysis Conclusion,Introduction,Property right,Property right is generally effected through contracting individual behavior in organizations. In this paper, we focus on the contract between the owner and the mana
3、ger of the firm,Agency cost,Agency relationship is a contract under the principal engage the agent to perform service on their benefits which involves some decision making authority to the agent.Agency costs include, The monitoring expenditures by the principal The bonding expenditure by the agent T
4、he residual loss,The definition of the firm,The private corporation or firm is simply one form of legal fiction which serves as a nexus for contracting relationships legal fiction: certain organizations to be treated as individuals,II. Assumption,Permanent assumption,P.1 All taxes are zero P.2 No tr
5、ade credit is available P.3 All outside equity shares are non-voting P.4 No outside complex financial claims,such asconvertible bonds or warrants can be issued P.5 No outside owner gains utility other thanthrough the wealth and the cash flow,P.6 All dynamic aspect of the multiperiodnature of the pro
6、blem are ignored P.7 The managers wage are held constantthroughout the analysis P.8 There exist a single manager withownership interest in the firm,Temporary assumption,T.1 The size of the firm is fixed T.2 No monitoring or bonding activities arepossible T.3 No debt financing through bond, preferred
7、stock, or personal borrowing is possible T.4 All element of the managers decisionproblem included by the presence ofuncertainty and the existence ofdiversifiable risk are ignored,III. Agency cost on equity,No monitoring cost & Fixed the size of firm,V: value of the firm F: managers expenditures on n
8、on- pecuniary benefit U: indifference curve of the manager VF: budget constraint : fraction of managers equity,Slope = -1,F,F0,V,F*,V*,U2,0,Slope = -,Slope = -,U1,D,A,U3,B,F,V0,V,FIRM VALUE AND WEALTH,D: optimal set between non-pecuniary and firm value B: the final set when the fraction of outside e
9、quity is(1-) V: V* V0 V F: F* F0 F,Theorem,For a claim on the firm of (1-) the outsider will pay only (1-)V when he expect the firm to have given the induced change in the behavior of the owner- manager.W = S0 + Si = S0 + V(F, )= S0 +V = (1-)V + V= V,Determination of the optimal scale of the firm,W
10、: initial pecuniary wealth I : access to a project requiring investment outlay A : the gross agency cost,CURRENT DOLLARS,MARKET VALUE OF THE STREAM OF MANAGERS EXPENDITURESON NON-PECUNIARY BENEFITS,W+V(I*)-I*,Expansion path with 100% ownership by manager,Expansion path with fractional ownership by m
11、anager,W+V*-I*,W+V-I,A,F*,F,C,D,Slope = -1,Slope = -,The managers indifference curve is tangent to a line with slope to - The gross agency costs is equal to (V*-I*) (V-I) = - (F*-F) V - I + F = 0( since V = V - F) (V - I ) ( 1 - )F = 0,The role of monitoring activities in reducing agency cost,M : th
12、e optimal monitoring expenditure of the outside ( for this case: distance between C & D)BCE : the opportunity set as the tradeoff constraint facing the ownerV = V F(M, ) - M,Slope = -1,F,V,F*,V*,U1,0,Slope = -,B,F,V,FIRM VALUE AND WEALTH,U2,U3,V”,F”,MARKET VALUE OF MANAGERS EXPENDITURESON NON-PECUNI
13、ARY BENEFITS,C,D,E,M,Expansion path with monitoring and bonding activities,P1: Expansion path with 100% ownership by manager P2 : Expansion path with fractional managerial ownership but no monitoring or bonding activities P3 : Expansion path with fractional managerial ownership and monitoring and bo
14、nding activities,CURRENT DOLLARS,MARKET VALUE OF THE STREAM OF MANAGERS EXPENDITURESON NON-PECUNIARY BENEFITS,W+V(I*)-I*,F*,F,F,C,G,D,W+V*-I*,W+V-I,F”,v,P1,P3,P2,v = W + V” I” M M = m + b m : cost of monitoring activities b : cost of bonding activities A(m, b, , I) = ( V* - I* ) ( V” I M ),IV. Agenc
15、y cost on debt,Three part of agency cost on debt,The incentive effects associated with highly leveraged firms The monitoring and the bonding expenditures by the bondholders and the owner-manager Bankruptcy and reorganization costs,The incentive effects,The opportunity wealth loss caused by the impac
16、t of the debt on the investment decision of the firm.,The incentive effects,Bankruptcy behavior is the willingness of the residual claimant to engage in extremely high risk projects when there is no equity at stake. Under-investment is often find that new investment helps the bondholders at the stoc
17、kholders expense,The role of monitoring and bonding cost,To limit the managerial behavior which results in reductions in the value of the bonds for the bondholders,V.Corporate ownership structure,Optimal ratio of outside equity and debt,Si : inside equity S0 : outside equity B : debt S = S0 + Si ; V
18、 = S + B E = S0 / ( B + S0 ) As0(E) : agency cost of outside equity AB(E) : agency cost of debt AT(E) : As0(E) + AB(E),Agency cost(measured in unit of current cost),Fraction of outside financing obtained from equity,A t (E*),E* = ( S0 / (B + S0),AT(E) : As0(E) + AB(E),As0(E),AB(E),1.0,E,0,Effects of
19、 the scale of outside financing,K = ( B + S0 ) / V* V* : the scale of the firm (constant) K i : different level of outside financing K1 K2 V1* V2*,Total Agency cost,High outside Financing,Low outside Financing,Fraction of outside financing obtained from equity,A*T(E,K1),A*T(E,K0),E*(K0),E*(K1),1.0,A
20、s0(E,K1),As0(E,K0),AB(E,K1),AB(E,K0),Total agency cost,0,K,AT(E*,K,V*),A*T(K,V1*),AT(K,V0*),Total agency costs as a function of the fraction of the firm financed by outside claims for two firm sizes, V1* V0*,Risk and the demand for outside financing,The owner-manager will invest 100% of his personal
21、 wealth in the firm and then resort to outside financing but in fact he allocate his wealth in diversified ways to reduced the risk. So when he want to reduce this cost he will bear some agency cost( from the issuance of equity and debt),Marginal agency costs and marginal value of diversification (m
22、easured in units in units of current wealth),Fraction of firm financed by outside claims,K*,1.0,K,demand for outside financing,Marginal agency cost:, K,一,AT(E*,K,V*),Optimal amount of outside financing, K*,VI. Qualifications and extensions of the analysis,Multiperiod and extension of the analysis,Th
23、roughout our analysis we are dealing only with a single investment-financing decision and have ignored the future financing-investment decisions. If we take this into account it will have some changes such as the future sales of outside equity and debt, managers decision, agency cost and etc.,The co
24、ntrol problem and outside owners agency costs,We have assumed that all outside equity is nonvoting. If such equity have voting right, the manager will concern about the effects on his long-run welfare of losing effective control of the firm (the danger of being fired). So to determine an equilibrium
25、 distribution of outside equity is necessary.,A note on the existence of inside debt and some conjectures on the use of convertible financial instruments,Bi / Si = B0 / S0 Bi / Si B0 / S0 Some other convertible securities such as warrants, convertible bonds, and convertible preferred stock,Monitorin
26、g and the social product of security analysts,A large body of evidence exist which indicates that security prices incorporate in an unbiased manner all public available information and much of what might be called “ private information.” Furthermore, the security analysis activities will reduce the
27、agency costs associated with the separation of ownership and control they are indeed social productive.,Specification in the use of debt and equity,Our previous analysis of agency costs suggests at least one other testable hypothesis: I.e., that in those industries where the incentive effects of outside equity and debt are widely different. The theory predicts the opposite would be true where the incentive effects of debt are large relative to the incentive effects of equity.,VII. Conclusion,
