Agency Theory

Abstract

This paper attempts to provide an overview of the major literature which has developed in the area of agency theory and corporate governance in the 25 years since Jensen and Meckling’s (1976) groundbreaking article proposing their theory of the firm. A discussion is provided as to why such problems arise within the ‘nexus of contracts’ that Jensen and Meckling describe as characterising the modern corporation and how managers and shareholders may act to control these costs to maximise firm value. The major articles covering areas where manager’s interests are likely to diverge from those of the shareholders who employ them are also reviewed. Papers which have both proposed and empirically tested means by which such conflicts can be resolved are also surveyed. This section also attempts to incorporate international comparisons, with particular reference to several recent published and unpublished academic research in the UK. Finally, some concluding remarks are offered along with some suggestions for future research in the area of corporate governance.