Agency Theory Essay 3 - 29591 Words

1 The Fundamental Agency Problem and Its Mitigation: Independence, Equity, and the Market for Corporate Control DAN R. DALTON Kelley School of Business, Indiana University MICHAELA. HITT Mays College of Business, Texas AM University S. TREVIS CERTO Mays College of Business, Texas AM University CATHERINE M. DALTON Kelley School of Business, Indiana University Abstract A central tenet of agency theory is that there is potential for mischief when the interests of owners and managers diverge. In those circumstances, and for a variety of reasons, managers may be able to exact higher rents than are reasonable or than the owners of the firm would otherwise accord them. While that foundational element of agency theory is†¦show more content†¦The Fundamental Agency Problem and Its Mitigation †¢ 3 Early on, three principal approaches were developed to minimize the agency problem. One, the independence approach, suggested that boards of directors, comprised to be independent of management, can monitor managers and assure that their interests do not diverge substantially from those of owners (Fama, 1980; Fama Jensen, 1983a, 1983b; Jensen Meckling, 1976; Mizruchi, 1983; see also Chandler, 1977). Another method, the equity approach, proposed that managers with equity in the firm were more likely to embrace the interests of other equity holders and, accordingly, to direct the firm in their joint interests (Fama Jensen, 1983b; Jensen Meckling, 1976). Lastly, there was the notion of the market for corporate control, which set forth the principle that corporate markets may operate to discipline managers who inappropriately leverage their agency advantage. In such cases, self-serving executives may subject the firm to acquisition by other firms (Fama Jensen, 1983a; Jensen Ruback, 1983; Manne, 1965). While these three corporate governance approaches are rational in principle, the efficacy of these approaches in practice remains subject to debate. Accordingly, in subsequent sections of this manuscript, we provide a multidisciplinary overview of agency theory with an emphasis on the three mechanisms through which the fundamental agencyShow MoreRelatedPositive vs Normative Accounting Theory Essay1032 Words   |  5 PagesEssay Guideline (brief simple short essay - example only to assist with planning) TOPIC: Discuss positive accounting theory and contrast it with normative accounting theory. Provide examples where appropriate.       The purpose of this essay is to provide an overview of positive accounting theory (PAT) and highlight how this theory differs to normative accounting theory. Definitions and assumptions of both theories will be considered and examples of the theories will be provided. 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