The Agency Problem
The Effectiveness of Pro-market Reforms, Ownership Structure and The Institutional framework at Addressing the Agency Problem and how Different Types of Firms in Transition Economies are affected by these measures.
As economies grow, in order for businesses to retain market shares, they can no longer rely on organic growth, many seek external finance either through initial public offerings or through banks, mutual funds and insurance companies. Although there are many side benefits of pursuing such growth strategy like dispersion of the entrepreneurs’ financial risk and gains from the specialised human capital of managers, there remains a significant problem: the principle-agent problem. While this problem is largely believed to be a phenomena belonging to transition economies, it concerns all economies as it directly affects access to capital hence the performance of businesses. The UK, US, Germany and Japan demonstrate some of the best corporate governance in the world however, whilst the US restrict large shareholders, Japan and Germany rely on large ownership by banks to curb managers’ opportunism. Despite the on-going discussion, both approaches are regarded as efficient and the overarching factor that gives them success is their effective legal system – institutional framework. Therefore, in my essay, I will firstly discuss the cause of the agency problem, then assess the different approaches to eliminate this problem namely, pro-market reforms and ownership structures but I argue that both of these factors rely primarily on the institutional framework to enforce regulations and legislations and protect the rights of either shareholders or creditors. Consequently, I propose that legal framework is the most important factor in addressing the agency problem. Lastly, I will comment on the effects of institutional reform on the different types of firms: domestic state-owned, domestic private and foreign firms in transition economies.
The Agency Problem
As economies grow, in order for businesses to retain market shares, they can no longer rely on organic growth, many seek external finance either through initial public offerings or through banks, mutual funds and insurance companies. Although there are many side benefits of pursuing such growth strategy like dispersion of the entrepreneurs’ financial risk and gains from the specialised human capital of managers, there remains a significant problem: the principle-agent problem. While this problem is largely believed to be a phenomena belonging to transition economies, it concerns all economies as it directly affects access to capital hence the performance of businesses. The UK, US, Germany and Japan demonstrate some of the best corporate governance in the world however, whilst the US restrict large shareholders, Japan and Germany rely on large ownership by banks to curb managers’ opportunism. Despite the on-going discussion, both approaches are regarded as efficient and the overarching factor that gives them success is their effective legal system – institutional framework. Therefore, in my essay, I will firstly discuss the cause of the agency problem, then assess the different approaches to eliminate this problem namely, pro-market reforms and ownership structures but I argue that both of these factors rely primarily on the institutional framework to enforce regulations and legislations and protect the rights of either shareholders or creditors. Consequently, I propose that legal framework is the most important factor in addressing the agency problem. Lastly, I will comment on the effects of institutional reform on the different types of firms: domestic state-owned, domestic private and foreign firms in transition economies.
The Agency Problem
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