Understanding of Agency Theory and Firm Performance

The most common belief is that Agency Theory is based in the economic model of man (e. G. Brenna , 1994). Jensen and Neckline arguing that the theory is grounded in what they call REAM – the Resourceful, Evaluative, Maximizing Model (Jensen , 1994). They argue that the REAM most closely replicates human action and that the economic model of man is a simplified version that does not reflect the spectrum of human behavior. Lets see a table that compares the two of them with logical order. Comparison of Economic Model of Man and REAM

Economic Model of Man Rational Bounded Rational Maximized Maximized based on thorough evaluation Motivated by incentives Actions driven by Incentives Self-Interested Opportunistic with guile Opportunistic if beneficial Focus o Focus on extrinsic rewards Will substitute goods if beneficial (not driven exclusively by extrinsic rewards) Not other regarding Altruistic if beneficial Resourceful Resourceful – innovative when facing constraints and opportunities With the understanding that man is self-interested, ever opportunistic and driven by incentives, agency theory addresses the effect of having this man as manager in the modern corporation by providing prescriptions to taming him. Industrial organization economics providing a basic theoretical perspective on the influence of market structure on firm strategy and performance. There is a range of specific models, major determinants of firm-level profitability include: (1) characteristic of the industry in which the firm competes (2) the firm’s position relative to its competitors and (3) the quality or quantity of the firm’s resources. (1 )landlers variables A long tradition is concerned with identifying properties of industries intriguing to above-average profitability.

A large set of variables (growth, facilitation, capital and advertising intensity, etc. ) have performed differently in different studies, but the overall importance of these factors is beyond dispute (Reverberant, 1983). (2)Variables relating the firm to its competitors Originally perceived as the source Of market power market share and more specifically relative market share as viewed for this study serves as a proxy for some firm-specific relative competitive advantage resulting from learning effects and other firm specific assets. (3)Firm variables The typical economic model of firm performance explains from 15 to 40 percent of the variance in profit rates across firms.

Apart from random effects, measurement errors, and so forth, one can suggest at least three explanations for the ‘remaining’ variance. First, there may be important economic variables, the extent of which cannot be measured (e. G. Assets that are specific to an industry or a trading partner). Second, the ‘true’ model may be such that intervening economic variables differ from case to case, making aggregate analysis difficult. Third, with very few exceptions organizational factors are not considered in this literature. ORGANIZATIONAL MODEL OF FIRM PERFORMANCE Perhaps even more than their economist counterparts, organizational researchers have developed a wide variety of models of performance.

As an example managers can influence the behavior of their employees (and thus the performance of the organization) by taking into account factors such as the formal and informal structure, the planning, reward, control and information systems, their skills and personalities, and the relation of these to the environment. But on the other hand we have some questions about firm performance. Can a firm be over-differentiated in one area and under fractionated In another, but on the whole be just about right? In contrast, firm performance is an aggregate phenomenon. Numerous studies have demonstrated how changes in organizational structures, systems and practices have altered climate measures and hence individual performance .

Both organizational structure (p of control, size, levels) and organizational processes (performance reviews, budgeting, collaboration) were more closely associated with climate measures than with performance (both subjective and objective) measures, and that organizational climate was directly linked to performance. Other more clinical efforts have shown linkages between managerial practices and attributes or dimensions of organization climate and firm performance . Figure 1 illustrates the assumed causality Of the traditional climate model Of firm performance. This thesis has uncovered a number of interesting points, many of which are perceived to lend themselves to exam aspects for further research.

It would be interesting to obtain a more solid picture of our research and wows that research may provide an interesting basis for comparison with respect to the impact and consequences of Agency Theory and Firm performance within report governance mechanisms utilized today.

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