Efficient Market Hypothesis Essay
According to my opinion, agency theory is a good explanation for costs of capital. Agency theory defines contracts as under which one party – called principal – engages another party – called the agent – to perform service on the principal’s behalf. Concluding, the principal delegates decision-making authority to the agent.
Both sides of the contract are utility maximisers and the agent will not necessarily act in the principal’s best interests. This leads to the rise of agency costs. Agency costs …show more content…
As I have explained the fundamental prerequisite for understanding and evaluating the quote now, it is necessary to mention that it is not possible to measure the true financial performance of a company. Accounting is a social science and cannot be objective: “Accounting as a social science is bidirectional and does not have an objective and separate existence from accountants'; (Godfrey-Jayne et al; 1997, p. 395). Accounting deals with measurements and should as good as possible enable users to determine the fair value: “The amount for which an asset could be exchanged between a knowledgable, willing buyer and a knowledgable, willing seller in an arm’s length transaction'; (AASB 1013). This leads to the principle of presenting a true and fair view of the company. If this aim could be achieved, than investors should gain full confidence in the integrity of markets, reducing their monitoring and bonding costs, which should result into a reduction of the cost of capital.
But the production of accurate