Agency Problems Auditing and the Theo
Agency Problems, Auditing, and the Theory of the Firm: Some Evidence
Author(s): Ross L. Watts and Jerold L. Zimmerman
Source: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/725039
Accessed: 29/06/2008 23:14
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AGENCY PROBLEMS, AUDITING, AND
THE THEORY OF THE FIRM: SOME
EVIDENCE*
ROSS L. WATTSand JEROLDL. ZIMMERMAN
Universityof Rochester
I.
INTRODUCTION
RXecent developments in the theory of the firm emphasize the importance of monitoring the performance of parties to the firm.1 Jensen and
Meckling2 hypothesize that an audit is one type of monitoring activity that increases the value of the firm. An audit by someone independent of the manager reduces the incentive problems that arise when the firm manager does not own
Author(s): Ross L. Watts and Jerold L. Zimmerman
Source: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/725039
Accessed: 29/06/2008 23:14
Your use of the JSTOR archive indicates your acceptance of JSTOR 's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR 's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.
Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=ucpress. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.
JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org.
http://www.jstor.org
AGENCY PROBLEMS, AUDITING, AND
THE THEORY OF THE FIRM: SOME
EVIDENCE*
ROSS L. WATTSand JEROLDL. ZIMMERMAN
Universityof Rochester
I.
INTRODUCTION
RXecent developments in the theory of the firm emphasize the importance of monitoring the performance of parties to the firm.1 Jensen and
Meckling2 hypothesize that an audit is one type of monitoring activity that increases the value of the firm. An audit by someone independent of the manager reduces the incentive problems that arise when the firm manager does not own
References: 38 Mortimer Epstein, The Early History of the Levant Company 68 (1908). 41 Maud Sellers, The Acts and Ordinances of the Eastland Company 97 (1906). 42 John Latimer, The History of the Society of Merchant Venturers of the City of Bristol 69 (1903). emergenceof thejoint stock company(for example,the TurkeyCompany in1581,the Venice Companyin 1583,andthe Levant Companyin 1592).50 Pol. Econ. 185 (1951), discusses the effect of the extent of the market on the degree of specialization.