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Agency Theory in Management Accounting

agency theory

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35 views2 pages

Agency Theory in Management Accounting

agency theory

Uploaded by

darkknightrises1939
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Agency theory is the principle used to explain and solve problems in the relationship between

business people and their agents. Most commonly, that relationship is the relationship between

shareholders, as principals, and company executives, as agents. The current origin of

representation theory has not been unified by researchers, according to the timeline and from the

author's summary documents, which summarize the development process of agency theory.

According to research Arrow 1971, Wilson 1968 on the problem of risk sharing between parties

and organizations, they found that there are individuals and groups in the company with different

risk tolerance and different actions. . Owners who invest capital with economic interests in the

company can bear the risk because the representatives or managers of the company also always

want to maximize personal interests. Both the principal and the principal have opposing risk

priorities and their problem, in risk sharing, creates a conflict of agency theory.

In Ross and Mitnick's work on surface theory, the authors have introduced two different

approaches in their studies. Ross sees the agent problem as a matter of preference, while Mitnick

sees the problem as a result of institutional structure, the central ideas behind their theory being

similar. Ross identified the principal agent problem as the result of the compensation decision

and argued that the problem is not limited to the company, but prevails in society as well.

Mitnick's institutional approach helped develop the logics of agency theory, and it can be

designed to govern the behavior of parties. His theory propagates that organizations are built

around the relationship between the agent and the principal.

In the study Alchian and Demsetz (1972); Jensen and Meckling (1976) defined a firm as a set

of contracts between factors of production. They describe that companies are legal entities where

some contractual relationship exists between the people involved in the company. An agency

relationship is also a type of contract between an owner and an agent, where both parties work

for their benefit resulting in a conflict of interest. In this context, owners perform various
monitoring activities to limit the actions of agents to control agency costs. In the principal

agency contract, incentive structure, the labor market and information asymmetry play an

important role and these factors have helped to develop the theory of ownership structure.

This was followed by a study by Jensen and Meckling (1976) which described the company

as a black box, working to maximize its value and profits. Wealth maximization can be achieved

through a suitable synergies and teamwork among the stakeholders within the company.

However, the interests of the parties differ, a conflict of interest arises, and it can only be limited

through ownership and management control. The parties also understand that their interests can

only be satisfied if the company exists.

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