Principalagencytheory in mergers and acquisitions grade 2,0 author tobias marsch author year 2015 pages 19 catalog number v302640 isbn ebook 9783668009615 isbn book 9783668009622 file size 514 kb language english tags. Agency theory draws attention to certain behaviors of ceos and boards that, in ag greg ate, create losses for soc iety. When the managers of a firm do not have a significant ownership interest in the firm, they may act in such a way that reduces the value of the firm. The principal keeps the random output minus the salary and commission. The failure to address the issues that concern merger and acquisition impacts the new and current organization very negatively at the stage of postmerger in two levels. The first is the agency problem that arises when a the desires or goals of the principal and agent conflict and b it is difficult or expensive for the principal to verify what the agent is actually doing. The first scholars to propose, explicitly, that a theory of agency be created, and to actually begin its creation, were stephen ross and barry mitnick, independently and roughly concurrently.
The study aims to outline critical success factors in mergers and acquisitions and identify their underlying link to the agency theory. Critical success factors in mergers and acquisitions. Agency theory is used to expand the research in strategic human resource management shrm by viewing the construct underlying shrm as control over all employees. Agency theory can be considered to be the most widely used theory to explain executive1 compensation. Agency concepts explicitly appear in the statutory schemes of many business organizations. The uses and abuses of agency theory in business ethics. Agency theory as a framework for higher education governance. Although the law of agency had a role in the naming of the theory of agency, it would be many years before other scholars also applied materials from the law of agency to the social science theory of agency see robert clarks chapter in the pratt and zeckhauser 1985 volume. The criticisms on agency theory and its application. Larson july 14, 20 stewardship theory history and overview stewardship theory is a relatively new concept karns, 2011 and assumes that the manager is a steward of the business with behaviors and objectives consistent with those of the owners. Agency theory is an important, yet controversial, theory. Conflicting interests the agency theory says that firms merge to resolve the conflicts of interest that exist between shareholders and managers. In the general partnership, for example, partners are agents with apparent authority to bind the partnership for acts in the ordinary course of the partnership business.
Introduction the law of agency is the law of delegationi. Larsons m3a1 stewardship theory, stakeholder theory, and. Agency theory is the study of incentives provided to agents. Origin of the theory of agency university of pittsburgh. Agency theory in business and management research oxford. A theory of mergers and firm size we propose a theory of mergers that combines managerial merger motives with an industrylevel regime shift that may lead to valueincreasing merger opportunities. Stewardship theory the impartiality of the board is compromised. Management of a more efficient acquiring firm can bring up the level of efficiency of the acquired firm, providing both social and private gain. Agency theory the study of the relationship between an agent such as a broker and a principal such as a client. Principal agency theory in mergers and acquisitions tobias marsch term paper business economics controlling publish your bachelors or masters thesis, dissertation, term paper or essay. Financial agency theory, in organizational economics, a means of assessing the work being done for a principal i.
Merger analysis, industrial organization theory, and merger. The executive manager, under this theory, far from being an opportunistic shirker, essentially wants to do a good job, to be a good steward of the corporate assets. Agency theory the analysis of principalagent relationships, in which one person, an agent, acts on behalf of another person, a principal. Agency theory, from economics, focuses on ways to make the governance system of a corporation more efficient so that shareholders interests and performance expectations are realized by the chief executive officer ceo. Innovation theory versus agency theory since the late 1980s, the dominant ideology of corporate governance in the united states has been that, for the sake of superior economic performance, companies should maximize shareholder value msv. An essay or paper on agency theory in financial management. What theory explains the relationship between mergers and. First, we assume that managers derive private benefits from operating a firm in addition to the value of any ownership share of the firm they have. The stakeholder theory suggests there are differences between. Jul 08, 2016 according to this theory if the management of firm a is more efficient than the management of firm b and after firm a acquires firm b the efficiency of firm b is brought upto the level of efficiency of firm a. Agency theory implications for strategic human resource management. The study, which focused on a sample of maltese corporates, aims to assess whether these critical success factors are given importance during transactions.
The agency theory of corporate governance states that corporate executives and board members are legally and morally obligated to act in the best interests of the parties they represent, usually shareholders. I propose a categorization of such motives based on the residual. A way of studying the way that a broker and a client work together. A conglomerate merger is a technology that allows these projects to survive a period of distress.
Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Kulik, agency theory, reasoning and culture at enron. Agency theory broadened this risk sharing literature to include the so called agency problem that occurs when cooperating parties have different goals and division of labour. Mergers and acquisitions motives jrisy motis 1 toulouse school of economics ehess gremaq and university of crete jrissy.
Thus, it creates possibilities for altering the alignments that previously existed. Results also support the common expectation that organizational complexity is a. Law, theory, and practice we aim to change the way that transactional law is taught in u. Agency theory also seeks to reduce costs in disagreements between the two. In the basic agency model, a principal sets a salary and commission, and the agent chooses the effort to expend. Agency theory also known as the principalagent or principal agency theory model describes the relationship between two or more parties, in which one party, designated as the principal, engages another party, designated as the agent, to perform some task on behalf of the principal jensen and meckling, 1976.
Specifically, this theory is directed at the ubiquitous agency relationship,in which one party delegates work to another agent who performs that work. Ross is responsible for the origin of the economic theory of agency, and mitnick for the institutional theory of agency. This research examines agency theory in corporate control and corporate financial management. Agency theory seeks to explain the relationship in order to recommend the appropriate incentives for. Most commonly, that relationship is the one between. Jul 15, 20 agency theory broadened this risk sharing literature to include the so called agency problem that occurs when cooperating parties have different goals and division of labour. Why this theory focuses on merely two stakeholders.
Ross is responsible for the origin of the economic theory of agency, and mitnick for the institutional theory of agency, though the basic concepts. See, for example, details of the 2001 first unionwachovia merger wall street journal may 16. Basis for horizontal merger it may be social gain as well as private gain. Innovative enterprise solves the agency problem 3 3 1. In search of a solution, journal of business ethics, 59 2005. Mar 28, 2019 the agency theory of corporate governance states that corporate executives and board members are legally and morally obligated to act in the best interests of the parties they represent, usually shareholders. Positive agency theory positive agency theory2, the standard model of agency which we consider in this paper, has been extensively used as a basis for theoretical and empirical work by management. The principal in principalagent theories represents someone who delegates. Pdf theory and practice of mergers and acquisitions. Efficiency theories differential efficiency operating.
A reference point theory of mergers and acquisitions. Specific interest is directed toward the effects of agency theory on dividends, capital structure, capital budgeting, and mergers. Merger analysis, industrial organization theory, and. The failure to address the issues that concern merger and acquisition impacts the new and current organization very negatively at the stage of post merger in two levels.
We then face the dilemma of choosing between ols estimates biased due to endogeneity and 2sls. The conclusions are that agency theory a offers unique insight into in. The conclusions are that agency theory a offers unique. Governance issues are called agency problems in the academic literature because they involve agents the ceo, the board and management working on behalf of the owners shareholders. Agency theory is the explanation of the dynamics that occur in these relationships and especially offers an explanation for what happens when there is a problem or conflict in goals that arises. Willig department of justice merger analysis, industrial organization theory, and merger guidelines the leadership of the antitrust. Aug 05, 2019 the agency theory looks to outline the interests of a principal and an agent, which can include an individual and a financial planner. Alexander pepper and julie gore behavioral agency theory. Agency and organisational economics theories predict that when the ceo also holds the dual ro. The study, which focused on a sample of maltese corporates, aims to assess whether these critical success factors are. In practice this is mitigated by lockup fees and breakup options. This theory will help in determining the best incentives for both individuals in enacting a successful transaction, as well as seeking to reduce the expenses that are related to any potential disagreements between the broker and the client. Contracts we will focus on contracts in which the agents total compensation for the period of the contract, denoted by w, is a linear function of output. Principalagencytheory in mergers and acquisitions publish.
Two of the most important stylized facts about mergers are the following. Agency theory seeks to explain the relationship in order to recommend the appropriate incentives for both parties to behave the same way, or more specifically, for the agent to have the incentive to follow the principals direction. Apr 18, 2019 agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Complementary explanations for subsidiary power in multinational corporations in bridging ib theories, constructs, and methods across cultures and social sciences t. Oct 10, 2007 the first scholars to propose, explicitly, that a theory of agency be created, and to actually begin its creation, were stephen ross and barry mitnick, independently and roughly concurrently.
According to this theory if the management of firm a is more efficient than the management of firm b and after firm a acquires firm b the efficiency of firm b is brought upto the level of efficiency of firm a. Agency theory,corporate governance and acquisitions. In our recently released textbook mergers and acquisitions. I cut a swathe through the social fabric where agency relationships are especially prevalent and examine some of. Agency theory arguesusing fundamental assumptions that agents are.
Agency theory to keep the exposition simple, we will make a very specific assumption. Agency theory is one the most prominent theoretical perspectives utilized in business and management research. When a lawmaker delegates authority to an agency, for example, the lawmaker is the principal and the agency is the agent. Agency theory implications for strategic human resource. The agency theory looks to outline the interests of a principal and an agent, which can include an individual and a financial planner. The empiri cal lit erat ure, ho wever, c hara cteri zed by. A merger changes the ownership of target and possibly bidding firms. The research is based on the hypothesi s that the solution for the agency problem lie in the combination of several. Effects of ceo ownership, administrative hrm, and incentive alignment on firm performance. Agency theory often comes into play when weighing shortterm versus longterm gains. Department of accounting, chaoyang university of technology.
A merger in simple words refers to combining of two companies into one. Broadly, the studies find and the theory puts forth that there is a higher consequence arising from preexisting structural characteristics, over those that are cultural. The agent represents someone to whom authority is delegated. While consistent with the concept of agency traditionally advanced by legal scholars and attorneys, the economic variants of agency theory emphasize the costs and benefits of the principalagent relationship. Second, we assume that there is a regime shift that creates potential synergies. Eisenhardt stanford university agency theory is an important, yet controversial, theory. Agency theory is concerned with resolving two problems that can occur in agency relationships. Apr 02, 2009 our theory of mergers is able to reconcile both of these stylized facts. Willig department of justice merger analysis, industrial organization theory, and merger guidelines the leadership of the antitrust division of the u. According to differential theory of merger, one reason for a merger is that if the management of a company x is more efficient than the management of the company y than it is better if company x acquires the company y and increase the level of the efficiency of the company y. Download limit exceeded you have exceeded your daily download allowance. In our forthcoming journal of finance article eat or be eaten. Efficiency theories differential efficiency operating synergy.
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