Agency Theory Research Paper

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In this assignment we are going to discuss what is meant by agency theory, the agency relationship, and problems of agency theory together with their solutions as well as the assumptions.

An agency is characterised as a relationship between two gatherings, one referred to as the main the other known as an operator, whereby an executor speaks to the primary to participate in a transaction with an outsider. An agency relationship gets to be successful once the vital delegates or contract the executor to render an administration for the benefit of the principal.

Agency theory explains how to best organise relationships in which one gathering decides the work while another does the work.

Agency theory is developed as a framework for analysing

Both the principal and the agent are utility maximizers, and the utility capacities of principal and agent are commonly autonomous. This implies there is no common argument in their utility capacities.

2. Income and effort are two major arguments in the utility function of the agent. Income will provide utility to the agent, but effort will provide disutility. Thus, the agent will always attempt to maximise income and minimize effort. Facing this utility conflict, which means that the utility of one argument is the disutility of the other, the agent will not act in the interest of the principal unless he is motivated by the remuneration contract to do so.

3. The principal knows perfectly what actions should be taken by the agent, but the information about the agent’s actual action is available only to the agent himself. Because the agent’s efforts observable or unobservable, but information about it cannot be collected, the principal can monitor the agent’s actions by direct observation or indirect information collected to obtain knowledge about the agent’s

The information about outcomes is directly available to the principal, and the outcome is perfectly correlated with the agent’s efforts.

Conclusion

Separation of ownership and management in listed companies has a huge impact on its performance.at times managers get allured to do certain things that go against company values, reason being they have been vested the influential capacity concerning company actions. Basically this kind of incidents happen when the main goal of the managers is to enhance their own wealth. Agency theory can be defined as the conflict between interest of the manager as well as that of the company, this results in deducing the firm’s worth. All this can be solved or avoided through market forces and agency costs.

In the case of Girvan Corporation, conflict occurred between goals of management and that of the shareholders. Management were covering up the poor performance of the business which lead to the firm’s collapsing. Although this theory has its own limitations, separating the agent from the principal increase the board independence by effective monitoring of managerial actions as well as behaviour. Therefore we can agree that agency theory is useful in