ECN 204 Lecture Notes - Lecture 10: Risk Aversion, Agency Cost, Risk Neutral
Document Summary
Agency theory, a branch of game theory, which studies the design of contracts between principal and agent that motivate the agent to work in the best interest of the principal. An efficient contract does this at lowest cost to the principal. Agents work is usually too complex for the principal to observe directly (moral. 2 important agency relationships are of interest: employment contracts btw the firm (firm owners) and its managers, lending contracts btw the firm and its lenders. Agency theory is relevant to accounting b/c both types of contracts often depend on the fi(cid:396)(cid:373)"s (cid:396)epo(cid:396)ted ea(cid:396)(cid:374)i(cid:374)gs (cid:894)e(cid:454). Ma(cid:374)age(cid:396)ial (cid:271)o(cid:374)uses (cid:373)a(cid:455) (cid:271)e (cid:271)ased o(cid:374) n/i o(cid:396) le(cid:374)de(cid:396)s may have debt covenants) Remember tho: economic consequences are created when accounting standards (cid:272)ha(cid:374)ge du(cid:396)i(cid:374)g the te(cid:396)(cid:373) of (cid:272)o(cid:373)pe(cid:374)satio(cid:374) a(cid:374)d de(cid:271)t (cid:272)o(cid:374)t(cid:396)a(cid:272)ts so (cid:373)a(cid:374)age(cid:396)s ha(cid:448)e a legitimate interest in the design of new accounting standards. Reported n/i has a different role in a managerial contracting context than it does for investors.
