The paper develops a theory that costs will rise as a firm expands from the three elements of property rights, agency, and finance structure. A firm’s ownership structure is derived from a market force investigated in the concept of agency and its relationship to “separation and control” along with the nature of agency costs generated by debt and outside equity being invested. Agency costs are spread about between all owners and this will reflect attitudes one would have about a firm if his costs were lowered.
An owner has complete control of a firm and its property rights; pecuniary and non-pecuniary benefits as the sole-proprietor. However, having limited funds might or not enough funds to bring an idea to market can impede the growth of a firm and the owner’s pecuniary benefits. The addition of other owners however introduces a cost in the loss of a vision because other owners might differ in viewpoints about the direction of the firm and entire control along with complete future claims on assets. In addition the new owner occur a cost on monitoring the owner-manger. “Prospective minority shareholders will realize that the owner-manager’s interests will diverge somewhat from theirs; hence the price they will pay for shares will reflect the monitoring costs and the effect of the divergence between the manger’s interest and theirs.” (11)
The authors state that the fractional loss on these claims will reduce the behavioral incentives of a founder. “The most important conflict arises from the fact that as the manger’s ownership claim falls, his incentive to devote significant effort to creative activities such as searching out new profitable ventures falls.” (12) This action would cause concern fo ...