Agency Theory Essay 3
Topics: Corporate governance, Board of directors, Corporate title, Management, Corporation, Chairman / Pages: 119 (29582 words) / Published: Jan 11th, 2011

1
The Fundamental Agency Problem and Its Mitigation:
Independence, Equity, and the Market for Corporate Control

DAN R. DALTON
Kelley School of Business, Indiana University

MICHAELA. HITT
Mays College of Business, Texas A&M University

S. TREVIS CERTO
Mays College of Business, Texas A&M University

CATHERINE M. DALTON
Kelley School of Business, Indiana University

Abstract

A central tenet of agency theory is that there is potential for mischief when the interests of owners and managers diverge. In those circumstances, and for a variety of reasons, managers may be able to exact higher rents than are reasonable or than the owners of the firm would otherwise accord them. While that foundational element of agency theory is secure, other elements derived directly from agency theory are far less settled. Indeed, even after some 75 years of conceptualization and empirical research, the three principal approaches that have long been proposed to mitigate the fundamental agency problem remain contentious. Accordingly, we provide a review of the fundamental agency problem and its mitigation through independence, equity, and the market for corporate control. 1

2 • The Academy of Management Annals Introduction Agency theory is secure among the pantheon of conceptual/theoretical foundations that inform research in corporate governance. Indeed, agency theory not only predates other influential theories, including resource dependence (e.g., Pfeffer & Salancik, 1978; Selznick, 1949; Thompson & McEwen, 1958; Zald, 1969), the resource-based view (e.g., Barney, 1991; Barney, Wright, & Ketchen, 2001; Wernerfelt, 1984), and institutional theory (e.g., DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Oliver, 1991; Rogers, 2003; Scott, 1995), but remains the dominant perspective on which governance research relies. ' A variety of comments may underscore that view. Bratton (2001; see also Bratton, 1989) described Berle and Means ' impact on legal scholarship "as a



References: The Fundamental Agency Problem and Its Mitigation • 59 Lovallo, D,, & Kahneman, D, (2003), Delusions of success: How optimism undermines executives ' decisions

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