This paper integrates elements from the theory of agency, the theory of property rights and the theory of fi nance to develop a theory of the ownership structure of the fi rm. We defi ne 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, demon strate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new defi nition of the fi rm, 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.
Agency theory; agency costs; ownership structure; equity; property rights