Agency Costs and Financial Decision-Making
Agency Costs and Financial Decision-Making
The Concept
An agency relationship is a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers and they may have divergent goals and objectives, and there is good reason to believe that the agent will not always act in the best interests of the principal (Jensen, Michael C., and William H. Meckling. "Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3 (October 1976), 305-360)
The concept of agency cost recognizes there are fundamental differences in how shareholders, managers, and even bondholders interpret their respective relationships to an organization. While they may share some common goals and objectives, there is the potential for at least some objectives to emerge that are focused more on individual enrichment than on the well-being of the whole. For example, managers may be more focused on building a reputation for themselves, possibly creating their own power bases within the structure of the larger organizations. Shareholders may become more focused on earning dividends now and less on the future of the business. Bondholders may be concerned only with the project associated with the bond issue, and lose sight of how the overall stability of the company can have a negative impact on the return earned from that bond. ( http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html#ixzz14WVaUW4g)
Agency Costs is an economic concept which is defined as the cost incurred by an entity in relation to issues like varied goals and objectives of the management and shareholders and information asymmetry.
Self-Interested Behavior
Agency theory suggests that, in imperfect labor and capital markets, managers will seek to maximize their own
The Concept
An agency relationship is a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers and they may have divergent goals and objectives, and there is good reason to believe that the agent will not always act in the best interests of the principal (Jensen, Michael C., and William H. Meckling. "Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3 (October 1976), 305-360)
The concept of agency cost recognizes there are fundamental differences in how shareholders, managers, and even bondholders interpret their respective relationships to an organization. While they may share some common goals and objectives, there is the potential for at least some objectives to emerge that are focused more on individual enrichment than on the well-being of the whole. For example, managers may be more focused on building a reputation for themselves, possibly creating their own power bases within the structure of the larger organizations. Shareholders may become more focused on earning dividends now and less on the future of the business. Bondholders may be concerned only with the project associated with the bond issue, and lose sight of how the overall stability of the company can have a negative impact on the return earned from that bond. ( http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html#ixzz14WVaUW4g)
Agency Costs is an economic concept which is defined as the cost incurred by an entity in relation to issues like varied goals and objectives of the management and shareholders and information asymmetry.
Self-Interested Behavior
Agency theory suggests that, in imperfect labor and capital markets, managers will seek to maximize their own
References: Bamberg, Giinter, and Klaus Spremann, eds. Agency Theory, Information, and Incentives. Berlin: Springer-Verlag, 1987. Fama, Eugene, and Michael Jensen. "Agency Problems and Residual Claims." Journal of Law and Economics 26 (1983), 327-349. Jensen, Michael C., and William H. Meckling. "Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3 (October 1976), 305-360. http://www.wisegeek.com/what-is-an-agency-cost.htm http://en.wikipedia.org/wiki/Agency_cost http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html#ixzz14WVaUW4g