Theory of the Firm, Agency Cost, and Budgeting
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
MBA 5501 W5 DB1-1 (2).docx
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
Breaking the Budget.pdf
Good Bye Traditional Budgeting
Good Bye Traditional Budgeting.pdf
Theory of the Firm, Agency Cost, and Budgeting
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Theory of the Firm, Agency Cost, and Budgeting
Question One
Over the years, there has been existence of various corporations. However, one common question individuals have been asking is why most corporations exist. Even though various theories explain why the organization exists, one of the most outstanding theories is the theory of the firm. The theory of the firm highlights that the organization's main goal is to maximize profits (Jensen & Meckling, 1976). The theory of the firm usually affects the decision-making of a business to a certain degree. For example, investors usually prefer to allocate resources in areas with less cost and high returns. Furthermore, the business also employs production techniques to maximize profits by eliminating costly techniques with less returns. Moreover, the aim of the business to maximize profits guides the business in managing the agency costs. For example, there have been instances where organizations are controlling the quality of the hotels that the managers can visit to prevent the organization from suffering huge costs and less returns.
Even though agency costs are usually incurred, some instances expose the business to agency problems. One of the agency's problems is when managers go for an extremely expensive tour that will not positively impact the business. In this scenario, the business will reduce the level of profit that it could have enjoyed. The other common agency problem is where the leader of an organization uses false accounting reports to increase the value of shares. For example, the Enron fall of 2001 showed how agency problems usually arise. Kenneth Lay, the company's chairman, CEO Jeffrey Skilling, and the CFO collaborated in selling shares using false accounting re...