Financial Crisis

Topics: Subprime mortgage crisis, Financial crisis, Subprime lending Pages: 10 (3551 words) Published: August 27, 2013
1 Introduction
The latest global financial crisis was exploded in 2008. This was the most serious financial crisis since the economic depression which occurred in 1930s and it severely impacted the global financial market. Lots of corporations collapsed during the 2008 financial recession which was caused by breakage of capital chain. Although some companies did not bankrupt during that period, they also had suffered huge loss.

The 2008 global financial crisis began from America. American financial crisis came from the prosperity of real estate. Before the 2008 global financial crisis, a large number of financial derivatives were generated and financial bubble became more and more serious. Finally, American sub-prime crisis occurred which leaded to a large number of bank failure. This paper will analyze the reason of American sub-prime crisis and indicate the relevance between Ghoshal's article, agency theory and the 2008 global financial crisis. This essay will argue that agency theory contributes to the 2008 global financial recession.

2 Review of the literature
2.1 Agency theory
Agency theory has described a relationship between principals and agents. It also can solve this relationship through a contract that 'one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent' (Jensen and Meckling, 1976:308, citied in Luhman and Cunliffe, 2013).

2.2 Bad theory and human's morality and ethic
After the collapse of Enron, Ghoshal (2005) strongly argues that business school does not need to do lots of things. In contrast, they just need to terminate some old courses which they are teaching for their students. The reason is that the root of the issues in management practices can be found in the theories of management. Additionally, management practices which are condemned are enhanced by these 'theories and ideas' (Ghoshal, 2005: 75). Moreover, business school cannot address the issues of moral and ethic.

Schlossman, Sedlack and Wechsler (1998: 77, citied in Ghoshal, 2005) claim that management studies is regarded as 'a branch of' the social sciences. Namely, the issues of business studies can be analyzed and resolved in method of social sciences. However, Ghoshed (2005: 77) strongly argues that people use 'scientific' way to explore regulation so that they have ignored the moral and ethics of humans. Because there are some underlying basic diversities between physical sciences and business studies, some theories of physical sciences are not suitable for business studies. Furthermore, the parts of business studies which are related to physical studies are focused on by business school (Ghoshal, 2005). According to Ghoshal (2005), even though 'scientific methods' (p.77) exerts some positive influences, the cost is expensive. Therefore, this approach denies the subjective initiative of human. In addition, human's morality and ethic which are neglected by individuals are inevitable in human intentionality.

Jensen and Mechling (1976, cited in Ghoshal, 2005: 75) assert that an idea which 'mangers cannot be trusted' was taught to their students in business school. As a result, when these students graduate, they hardly trust their leaders and do not realize that they should strictly maintain personal integrity. Additionally, Even though Friedman (1953, citied in Ghoshal, 2005) acknowledges that the duty of agents is to maximize the profit of shareholders, Ghoshal discounts this view and argues that compared with finding a new job by employees, it is easier that shareholder can sell their corporation (Ghoshal, 2005). Furthermore, shareholder value maximization is the fundamental of the agency theory. However, Ghoshal (2005: 81) strongly asserts that they are not relevant and points out that these research and analyses are built on incorrect assumption, which means they are 'unrealistic'....
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