Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure - Annotated Bibliography Example

Article Summaries Jensen, MC &Meckling, WH 1976, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics, vol. 3, pp. 305-360. Article Summary This particular paper extends the notion of “agency theory’. The ‘agency theory’ focuses on the divergence of interests of the salient agents and respective principles in any firm. To put it simply, it pertains to the conflict of interest between managers in any firm and the firm’s owners. This paper focuses on the dilemma that the managers in a firm may take such decisions, being the caretakers of the owner’s assets, which they may not subscribe to, had they been the owners of the firm they manage. This paper studies the concept of agency cost, and its relation to the external equity and debt. The concept of ‘agency costs’ pertains as to how the owner of a firm structures and manages the respective incentives and compensations so as to encourage the managers to resort to such decisions, which add to the owners interests, in a monitoring scenario vulnerable to uncertainty and imperfection. The article defines agency costs as the monitoring cost incurred by an owner to restrain a manager from harming one’s interests, the resources spent by the manager to assure compliance with the owner’s interests, and the remnant losses. The theory propounded in this paper tends to explain an array of financial questions related to the issuance of preferred stocks, promulgation of audit reports and soliciting the services of auditors by managers, imposition of restrictions on firms by lenders and endorsements of such restrictions by borrowing firms, the choice of capital sources preferred by varied industries, etc. This article happens to be completely theoretical in its scope, methodology, and totally relies on mathematical models to propound a generalized ‘agency theory’. This article presents the finding that the separation of the actual management and ownership in any firm does always lead to the incurring of agency costs. The quantum of these agency costs will proportionally depend on the cost incurred by an owner if one does away with the manager concerned. The kind and magnitude of agency costs also depend on the types of monitoring costs accrued by an owner, the predilection of the concerned managers for monetary or non monetary gains, and the existence of such managers having the ability to maintain a total financial stake in any venture. The agency costs may be nil if an owner does not incur any monitoring costs. Agency costs may again be nil when a manager bears a complete financial stake in the venture one manages. Besides, in a debt scenario the nature and magnitude of agency costs will depend on the monitoring and compliance expenditures born by the firm and the respective bond holders. Thereby, this paper not only propounds and defines the notion of ‘agency cost’, but also elaborates on the importance and relevance of ‘agency costs’ with regards to the issue of separation of ownership and management in any firm. In addition it also explains as to which specific stakeholders sponsor and bear agency costs in varied types of equity and debt scenarios. Carey, A 1977, ‘The Lysenko Syndrome in Western Social Science’, Australian Psychologist , vol. 12, no. 1, pp. 27-38. Article Summary In this article the author puts forth the fact that many a times the social scientists distort their research findings to match the views of the dominant social powers. In the Middle Ages, many astronomers propounded theories that supported the Biblical notions of creation, backed by the powerful Church. The author says that this inclination to contrive research findings that support the dominant social and cultural biases and norms is prevalent even today. However, social scientists are more vulnerable to such pressures as their research has a direct relation to the society in which they live. A majority of the social scientists desist from propounding research findings that challenge the dominant ideologies, as this may prevent them from achieving material success and social recognition. Besides, the social scenarios and organizations in which the social scientists conduct their research are owned by the elites, who debar them from studying and analysing the dominant social classes. Also, the powerful interest groups in the society do assure that the social researchers do not eavesdrop on their psyche and motivations. Thereby, most of the psychological research in the West only pertains to the marginalized sections of the society. Besides, with the advent of the industrial revolution, not only the capitalist class has reinterpreted religion to further its aims and objectives, but it has also assured that the contemporary research in industrial psychology churns out findings that further its interests and agenda. To prove his point the author refers to three very important studies that had a strong bearing on the contemporary industrial relations. These studies are Hawthorne Studies, the 1939 study by Professor Kurt Lewin, and the 1948 studies carried out by Professor Lewin’s followers. Each of these three studies came out with the findings that conveyed that the working classes get more motivated by non monetary incentives, which appeal to their emotional and social needs. All these studies negated the importance of monetary incentives in assuring worker motivation. The interesting thing is that the actual findings of these studies no way supported the eventual theories that the proposed. Yet, the social scientists conducting these studies manipulated the research to come out with theories that furthered the interests of their capitalist sponsors. The writer goes on to assert that the financial and political elites do pursue an active agenda to manage and finance such propaganda that justifies beliefs and research findings, which further their goals and interests. To validate his argument, the writer does provide the statistical figures and data that prove that the dominant social groups spend millions on influencing research and public opinion to assure that the working class do not jeopardize the so called social harmony, in which they get maximum share of the national resources. Conclusively speaking, the writer criticizes the inclination of many social researchers to pander to the motives of the rich and the powerful. Yet, he concludes the article on a positive note, assuring that irrespective of the presence of such conforming influences, there will also be social scientists who will dare to conduct impartial and fact based research. Read More