Importance of agency theory concept

Specific regulation regarding director remuneration and city code on takeovers.

agency theory in auditing

Different Risk Appetite One of the major reasons for such strife is the levels of risk appetite each is willing to undertake. Shareholders are mostly not involved in the day-to-day working of the company and hence are not fully equipped to understand the rationale behind critical business decisions.

Agency theory in financial management pdf

It would be increasingly difficult with the increase in number of owners to make decisions and take quick actions as there will be a need for consensus among all owners or a majority of them. This will motivate more employees to act in the business's best interest. Keeping in mind the agency problems we can develop rules and procedures that help in formulation of corporate policies and practices that improves corporate governance. Specific regulation regarding director remuneration and city code on takeovers. For example, company executives may decide to expand a business into new markets. Companies that are quoted on a stock market such as the London Stock Exchange are often extremely complex and require a substantial investment in equity to fund them, i. Sometimes, the loss caused by such corrupt employees is beyond repair and an organization has to wind up its business altogether. Performance-based compensation is one example. The bondholder will issue covenants to restrict the behavior of the management. Auditors act as agents to principals shareholders when performing an audit and this relationship brings similar concerns with regard to trust and confidence as the director-shareholder relationship. Shareholders delegate control to professional managers the board of directors to run the company on their behalf. It is also an invaluable guideline when a company's long-term interests conflict with actions that may provide lesser but more immediate benefits to stakeholders. Agency theory is a step toward navigating these complex and sometimes conflicting obligations.

The conflict of interests between principal shareholder and agent director gives rise to the 'principal-agent problem' which is the key area of corporate governance focus. The audit is seen as a key component of corporate governance, providing an independent review of the financial position of the organisation.

advantages of agency theory

Even without the benefit of a tax shield, debt finance is used because of its leveraging benefits. Stock market: wide and limited individual ownership and the ability to simply sell without the need to take any interest in the firm.

However, investments that bring about quick returns tend to be riskier than strategies that unfold more slowly, allowing a company to adapt and adjust.

Importance of agency theory concept

It comes in handy if decision makers have a tendency to be greedy and profit at the expense of the company.

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Agency theory: its importance and agency costs of outside debt