1. DJ, 2003 Theories of the Firm Agency Theory

2. DJ, 2003 Introduction z Williamson: agency theory is the theory that focuses on the design and improvement of contracts between principals and agents z One major concern of the theory is the relationship between ownership and control z Agency theory is key to research (and law) in finance

3. DJ, 2003 Assumptions z Asymetric information and unbounded rationality are usually assumed z The main focus is on the contract y How can a contract be formulated so as to ensure that the “agent” acts in the interest of the “principal”?

4. DJ, 2003 Concepts: Agency Costs z Moral hazard z Teams z Shirking z Monitoring z Incentive contracts z Bonding

5. DJ, 2003 Application  Chandler: Agency theory is concerned with “owners' and managers' problems of coping with asymmetric information, measurement of performance, and incentives” z Example: poison pills.

6. DJ, 2003 Critique z Underlying psychological and philosophical principles assume the worst of human beings z The firm is seen as a “nexus of contracts” rather than as a social organisation z Does not contribute to an understanding of innovation and learning