The agency cost of financial decision making: an empirical analysis
Jensen and Meckllng in "Theory of the Firm: Managerial Behavior and Capital Structure"  introduced the concept that managers choose their ownership in the firm and leverage ratio to minimize agency costs. Easterbrook  and Rozeff  extended this notion with the hypothesis that dividends are paid to reduce equity agency costs. Myers  explained debt agency costs as being a possible underinvestment problem with risky debt, and Jensen  hypothesized that increases in debt could control the free cash flow agency problem. This dissertation will be a comprehensive test of Jensen and Meckling’s agency theory including extensions by Rozeff, Easterbrook, Myers and Jensen. To test agency theory a contemporaneous three equation model determining managerial ownership, leverage and dividends is specified. The exogenous variables include variables which are expected to impact upon agency costs, diversification measures, and variables registering non-agency explanations of leverage and dividends. This dissertation provides critically needed empirical evidence on the agency problem and a specific test of Jensen and Meckling.