Agency theory
Agency theory
Agency theory identifies the agency relationship where one party, the principal, delegates work to another party, the agent. In the context of a corporation, the owners are the principal and the directors are the agent. This model of corporate governance and subsequent research focused on resolving conflicts of interest between corporate management and shareholders (Jensen and Meckling, 1976) and has largely adopted an agency theory approach. Key assumption is that the principals and agents are anxious to maximise their own utilities at each others’ expense. As a result, there is almost always a divergence of objectives between the goals of the management and those of the shareholders. Governance seeks to reconcile the interests of principals and agents for the benefit of the company. The maximisation of shareholder wealth is assumed to be the company’s primary objective. One of the major causes for this agency problem is due to the information asymmetries which exist between the two parties. Information asymmetry exists because management are more closely involved in the business and for a longer time than the owners and thus have more information about the business than its owners individually (Aboody and Lev, 2000). A number of mechanisms have been devised to reduce agency problems and negate their impact on firms. There is a need to possess（拥有） incentive and monitoring mechanisms to ensure managers pursue shareholder wealth maximisation and the main focus of governance is the use and usefulness of incentive and monitoring mechanisms Incentive mechanism includes level and structure of remuneration and managerial ownership, and monitoring happened both internally and externally. Jensen and Meckling (1976) suggest that agency problems can be reduced by incurring agency costs, which consist of bonding costs and monitoring costs. Bonding costs are those which are incurred due to the contract between owners and management. Monitoring costs are the
Agency theory identifies the agency relationship where one party, the principal, delegates work to another party, the agent. In the context of a corporation, the owners are the principal and the directors are the agent. This model of corporate governance and subsequent research focused on resolving conflicts of interest between corporate management and shareholders (Jensen and Meckling, 1976) and has largely adopted an agency theory approach. Key assumption is that the principals and agents are anxious to maximise their own utilities at each others’ expense. As a result, there is almost always a divergence of objectives between the goals of the management and those of the shareholders. Governance seeks to reconcile the interests of principals and agents for the benefit of the company. The maximisation of shareholder wealth is assumed to be the company’s primary objective. One of the major causes for this agency problem is due to the information asymmetries which exist between the two parties. Information asymmetry exists because management are more closely involved in the business and for a longer time than the owners and thus have more information about the business than its owners individually (Aboody and Lev, 2000). A number of mechanisms have been devised to reduce agency problems and negate their impact on firms. There is a need to possess（拥有） incentive and monitoring mechanisms to ensure managers pursue shareholder wealth maximisation and the main focus of governance is the use and usefulness of incentive and monitoring mechanisms Incentive mechanism includes level and structure of remuneration and managerial ownership, and monitoring happened both internally and externally. Jensen and Meckling (1976) suggest that agency problems can be reduced by incurring agency costs, which consist of bonding costs and monitoring costs. Bonding costs are those which are incurred due to the contract between owners and management. Monitoring costs are the