Agency Theory

In: Philosophy and Psychology

Submitted By stunik23
Words 324
Pages 2
Agency theory is controversial and essential theory in accounting, economic and finance sphere. The theory raises a problem of agency relationship, in which, cooperating parties- principal and agent, have different goals and division of work. Agency theory arises two problems: the difficulty of verifying what the agent is actually doing, and the conflict between goals and desires of the principal and agent (Eisenhardt, 1989). Agency theory is based on two different approaches: positivist agency theory and the principal-agent research.
The first one describes the governance mechanism that limits the selfish behavior of the agent. Positivist agency theory identifies two propositions including governance system. If the contract between the principal and the agent is based on outcomes, there is a high probability that the agent will act in the interest of the principal. In addition if the principal has information to verify behavior of the agent, then the agent will act in the interest of the principal.
The second one, principal-agent stream, contains more testable implications than the positivist theory. There are several things like goal conflict, easily measurable outcome, and the assumption that the agent is more risk averse than the principal, that are assumed in principal-agent research. The main difference between these two theories is that the positivist agency theory identifies certain contract alternatives and principal-agent theory indicates which contracts are the most efficient. In order to take a closer look at the concept of agency theory the great rise and downfall of The Royal Bank of Scotland Group Plc (RBS) will be taken as a real business and economic case.
Conflict between shareholders, principals, and top executives as the agents, reached its peak in October 2007 when Sir Fred Goodwin declared takeover of ABN as "unconditional". At this moment…...

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