Reference no: EM133113099
Question - The seminal paper of M. Jensen and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," (Journal of Financial Economics 3, 1976, 305-360) starts by pointing out that agency costs have been recognized in the very text that is considered the foundation of modern economics, Adam Smith's "The Wealth of Nations" (1776). In the philosopher's own words:
"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."
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