Capital Structure, Agency Cost and Corporate Governance: Theoretical Linkages under the Operational Framework of a Modern Company

Abstract

The purpose of this paper is to explain the interaction mechanism between the capital structure of a modern company, the implying agency cost that is raised when the company is expanding and the corporate governance system that should be implemented in order to achieve a smoothness of the implied internal friction. The corporate governance experience suggests that there is a lack of a systemic management at those problems. The above corporate problems reduce the maximization of the company value. It is argued that the failure to maximize the value of the company can be attributed to the endogenous weakness of corporate interconnection. This paper analyses the theory of corporate interconnection between its agents (shareholders, executive managers and bondholders), contributes to a better understanding of those issues and propose some ideas of addressing them though a systematical and analytical framework.