Theory of the Firm and Agency Costs
Question#1: The Theory of the Firm attempts to explain how and why corporations exist. In its simplest form, corporations exist to maximize profits. As the economy grows increasingly complex, so have corporations.
How should the Theory of the Firm and Agency Costs impact our decision-making? Discuss agency problems with the help of some real-life examples (e.g. Enron or Xerox Corporation).
Below are links to an article. It is a long article, 76 pages. The key to this reading is the first 12 pages, Pages 32 (starting at 2.6) to page 40, Page 45 (starting at 4.2) to 51, Page 60, and the last 2 pages (71 and 72). Read and reflect upon them. You may wish to do some research of your own. Make sure you support your statements.
Theory of the Firm.pdf
Theory of the Firm Managerial Behavior Agency Costs and Ownership Structure
Question#2: Budgeting and Budgets are part of every organization's organizing and planning functions. Budgets are thought of as necessary for the execution of the Strategic Plan.
Are budgets a help or a hindrance to the execution of a Strategic Plan? Identify the limitations in traditional budgeting and discuss the suggested improvements.
Below are links to the articles. Read and reflect upon budgets. You may wish to do some research of your own. Make sure you support your statements.
Breaking the budget
Good Bye Traditional Budgeting
Theory of the Firm and Agency Costs
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Theory of the Firm and Agency Costs
Question 1
Usually, the theory of the firm impacts the decision-making process in several areas, such as allocation of resources, pricing modification, production techniques, and production volume. Agency costs consist of any fees linked with managing the requirements of conflicting parties' requirements while evaluating and solving disputes. Like other costs, agency costs are real, although the agency costs depend on several things, including common law and human originality in inventing contracts (Jensen & Meckling, 1976). They are essential expenses for a corporation where principals yield only some autonomous power. Unfortunately, they can harm their profitability because of their inability to function in a certain way, which is beneficial to the agents working under them.
Whenever management makes decisions that are not of interest to the firm and that shareholders see as an operation that would not upsurge their share's value, an agency's cost of equity rises. Several corporations, such as Enron and Xerox, are excellent examples of organization that discusses the real-life scenario of the agency problem. Enron's directors were legally responsible for protecting and promoting investors' interests. However, they owned little other incentives to carry the process. Unfortunately, the organization's board of directors could not execute its regulatory role and disallowed its oversight roles, forcing the firm into unlawful activity. The