Information Asymmetry And Principal Agent Theory
The legitimacy theory states that organizations seek to operate within what is considered acceptable in society. What is considered as acceptable behavior changes over time and the firm must be prepared for variations in the environment, taking ethical aspects into account
(Islam & Deegan, 2007). Even if there is no legal requirements, firm tend to publish corporate social responsibility reports, because other firms in the industry do so, a phenomenon known as isomorphism (DiMaggio & Powell, 1983, and Islam & Deegan, 2007).
Information asymmetry and principal agent theory
The main communication means for management is financial reporting and disclosure (Healy
& Palepu, 2001). Via the reports the management provides support for decision makers. The decision makers are found in several stakeholder groups. For the capital market to …show more content…
The agency problem can be solved e.g. via contracts
(Healy & Palepu, 2001). Here, information is needed for the principal to be able to see if the agent acts according to the contract. The principal-agent theory can be applicable to stakeholders as well as shareholders (see below).
Not all agree that the interest of several stakeholders should be included. From the perspective of shareholder value, the owners are special stakeholders and their interests should be prioritized. The company´s goal is to increase the value of the investments, i.e. to increase the wealth of capital owners. Shareholder value means that different groups of owners will in short term or long term see its investment increase in value, no consideration taken to other aspects, e.g. social or environmental aspects. The managers´ task is to increase the owners´ investment. The origin of the shareholder perspective is that most companies start from an owner initiative which is associated with risk. The owner or entrepreneur invests his or her resources in an idea, but without a guaranteed return on investment. The return to other stakeholders, e.g. lenders, employees, suppliers, is often regulated in contracts. The owner