COMM 318 Chapter Notes - Chapter 9: Earnings Management, Moral Hazard, Agency Cost
6 Apr 2016
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Agency theory, as a branch of game theory, which studies the design of contracts between principal and agent (e. g. management) that moivate the agent to work in the best interests of the principal (e. g. Agency theory, as a branch of game theory, which studies the design of contracts between principal and agent (e. g. management) that moivate the agent to work in the best interests of the principal (e. g. investors) Eicient contract does this at the lowest cost to the principal. Diicult for principles to examine the amount of efort being exerted by the agent, therefore creaing an issue of moral hazard agent may not work hard unless they are suiciently moivated. A way to observe agents efort is by tying their compensaion to some observable measure. Two important agency relaionships: (1) employment contracts between the irm and its managers (2) lending contracts between the irm and its lenders. Both types of contracts oten depend on company"s reported earnings.
