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BRILLIANT’S Capital Structure Theories 363

 how to align the goals of the principal so  à‘wI Ho$ bú¶m| H$m H¡$go g‘m¶moOZ H$a| {Oggo {H$
that they are not in conflict (agency CZ‘| {ddmX Z hmo (EO|gr g‘ñ¶m) VWm
problem); and
 that the principal and agent reconcile  à‘wI VWm EO|Q> Omo{I‘ Ho$ {bE {d{^ÝZ g{hîUwVmAm|
different tolerances for risk. H$m {ZamH$aU H$aVo h¢&
Origins of Agency Theory Am°[aqOg Am°’$ EO|gr ϶moar

During the 1960s & 1970s , economists 1960 VWm 1970 Ho$ XeH$m| Ho$ Xm¡amZ AW©em{ñ̶m|
explored risk sharing among individuals or Zo ì¶{³V¶m| ¶m g‘yhm| Ho$ ~rM [añH$ eo¶[a¨J H$m AÝdofU
groups. This literature described the risk {H$¶m& ¶h gm{h˶ Bg ê$n ‘| [añH$ eo¶[a¨J g‘ñ¶m H$m
sharing problem as one that arises when co-
dU©Z H$aVm h¡ Omo gh¶moJr njm| ‘| Omo{I‘m| Ho$ n«{V {d{^ÝZ
operating parties have different attitudes
towards risk. Ñ{ï>H$moU CËnÝZ hmoVo h¢&
Agency theory broadened this risk sharing EO|gr ϶moar Zo VWmH${WV EO|gr g‘ñ¶m H$mo g{å‘{bV
literature to include the so called agency problem H$aZo Ho$ {bE Bg [añH$ eo¶[a¨J gm{h˶ H$m {dñVma {H$¶m h¡
that occurs when co-operating parties have
different goals and division of labour. O~ gh¶moJr njm| Ho$ {d{^ÝZ bú¶ VWm l‘ {d^mOZ hmoVm h¡&
Specifically, this theory is directed at the {d{eï> ê$n go ¶h ϶moar ¶y{~³¶yQ>²g EO|gr g§~§Y na
ubiquitous agency relationship, in which one {ZX}{eV h¡ {Og‘| EH$ nj Aݶ EO|Q> H$mo H$m¶© gm¢nVm h¡
party delegates work to another agent who Omo Cg H$m¶© H$mo g§nÝZ H$aVm h¡& EO|gr ϶moar EH$ AZw~§Y
performs that work. Agency theory attempts Ho$ ‘oQ>m’$moa H$m Cn¶moJ H$aHo$ Bg g§~§Y H$m dU©Z H$aZo H$m
to describe this relation using the metaphor of
a contract. Agency theory suggests that the à¶mg H$aVm h¡& EO|gr ϶moar gwPmd XoVr h¡ {H$ g§ñWm
g§gmYZ YmaH$m| Ho$ ~rM AZw~§Y (bMrbo n[a^m{fV) Ho$
firm can be viewed as a nexus of contracts
(loosely defined) between resource holders. g§~§Y Ho$ ê$n ‘| XoIm Om gH$Vm h¡&
Conflicts Between Managers and Share- ‘¡ZoOg© VWm eo¶ahmoëS>g© Ho$ ~rM {ddmX
holders
Why conflict of interest between eo¶ahmoëS>g© VWm ‘¡ZoO‘|Q> Ho$ ~rM {hVm| H$m {ddmX
shareholders and management? ³¶m| hmoVm h¡?
To address the conflict of interest between eo¶ahmoëS>g© VWm ‘¡ZoO‘|Q> Ho$ ~rM {hVm| H$m {ddmX
shareholders and management, it is important
hb H$aZo Ho$ {bE Bg na ~b XoZm ‘hÎdnyU© h¡ {H$ eo¶ahmoëS>g©
to stress that even within the same class of
shareholders, there may be conflicts, this Ho$ g‘mZ dJ© Ho$ A§Xa ^r {ddmX hmo gH$Vo h¢ Bg {ddmX H$m
conflict may relate to what proportion of the g§~§Y hmo gH$Vm h¡ {H$ H§$nZr Ho$ bm^ H$m {H$VZm AZwnmV
company's profit should be paid in the form of {S>{dS>|S> Ho$ ê$n ‘| ^wJVmZ {H$¶m OmZm Mm{hE VWm ^{dî¶
dividend and what proportion should be
Ho$ {Zdoe Ho$ {bE {H$VZm AZwnmV aIZm Mm{hE VWm H¡${nQ>b
retained for future investments and for capital
investment purposes. {Zdoe Ho$ CÔoí¶ Ho$ {bE {H$VZm aIZm Mm{hE&
Other potential conflicts may involve Aݶ g§^m{dV {ddmXm| ‘| H§$nZr H$s Z¡{VH$ Zr{V¶m§,
company's ethical policies, its corporate and BgH$s H$m°nm}aoQ> VWm gm‘m{OH$ Xm{¶Ëd Zr{V¶m§ gpå‘{bV
social responsibility policies. hmo gH$Vr h¢&