ABSTRACT
THE SOCIAL AND PRIVATE COSTS OF AN AGENT’S ACTIONS due to incomplete alignment of the agent’s and owner’s interests were brought to attention by the seminal contributions of Jensen and Meckling (1976) on agency costs. Agency theory has also brought the roles of managerial decision rights and various external and internal monitoring and bonding mechanisms to the forefront of theoretical discussions and empirical research. Great strides have been made in demonstrating empirically the role of agency costs in financial decisions, such as in explaining the choices of capital structure, maturity structure, dividend policy, and executive compensation. However, the actual measurement of the principal variable of interest, agency costs, in both absolute and relative terms, has lagged behind.
