We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to

the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interest of the principal (Jensen and Meckling, 1976, page 308).

Critically evaluate the impact of agency costs on a firms capital structure.

Reference

Jensen, M.C. and Meckling, W.H., 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), pp.305-360.