This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

School. CEABuR’s inter-continental presence provides a unique environment promoting research in all aspects of international business. The centre focuses primarily on the economic and business links between Europe and Asia. It also aims to foster joint research between European and Asian scholars. To this end, CEABuR organises occasional seminars on current developments in the business world, acts as a point for collaborative research with other UK, Malaysian and overseas institutions and publishes research papers on topics central to its interests. A list of CEABuR research papers is given on the final page of this publication. Authors who wish to submit papers for publication should send their manuscripts to the Editor of the CEABuR Research Papers, Dr. Bala Ramasamy, at: