Overview of the Paper
We develop our theory in stages. Sections 2 and 4 provide analyses of the agency costs
of equity and debt respectively. These form the major foundation of the theory. In Section 3, we
pose some questions regarding the existence of the corporate form of organization and examines
the role of limited liability. Section 5 provides a synthesis of the basic concepts derived in sections
2-4 into a theory of the corporate ownership structure which takes account of the trade-offs
available to the entrepreneur-manager between inside and outside equity and debt. Some
qualifications and extensions of the analysis are discussed in section 6, and section 7 contains a brief summary and conclusions.