Agency Theory: An Assessment and Review

doi:10.5465/AMR.1989.4279003

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Agency Theory: An Assessment and Review

Journal Article•DOI•

Agency Theory: An Assessment and Review

Kathleen M. Eisenhardt¹•Institutions (1)

Stanford University¹

01 Jan 1989-Academy of Management Review (Academy of Management)-Vol. 14, Iss: 1, pp 57-74

TL;DR: In this article, the authors review agency theory, its contributions to organization theory, and the extant empirical work and develop testable propositions and conclude that agency theory offers unique insight into information systems, outcome uncertainty, incentives, and risk.

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Abstract: Agency theory is an important, yet controversial, theory. This paper reviews agency theory, its contributions to organization theory, and the extant empirical work and develops testable propositions. The conclusions are that agency theory (a) offers unique insight into information systems, outcome uncertainty, incentives, and risk and (b) is an empirically valid perspective, particularly when coupled with complementary perspectives. The principal recommendation is to incorporate an agency perspective in studies of the many problems having a cooperative structure.

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Journal Article•DOI•

Instrumental stakeholder theory: a synthesis of ethics and economics

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Thomas M. Jones¹•Institutions (1)

University of Washington¹

01 Apr 1995-Academy of Management Review

TL;DR: In this paper, the authors propose an instrumental theory of stakeholder management based on a synthesis of the stakeholder concept, economic theory, behavioral science, and ethics, with the core theory that a subset of ethical principles (trust, trustworthiness, and cooperativeness) can result in significant competitive advantage.

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Abstract: This article is intended to enhance the position of stakeholder theory as an integrating theme for the business and society field. It offers an instrumental theory of stakeholder management based on a synthesis of the stakeholder concept, economic theory, behavioral science, and ethics. The core theory—that a subset of ethical principles (trust, trustworthiness, and cooperativeness) can result in significant competitive advantage—is supplemented by nine research propositions along with some research and policy implications.

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3,516 citations

Cites background from "Agency Theory: An Assessment and Re..."

...The contract is an appropriate metaphor for the relationships between the firm and its stakeholders ( Eisenhardt, 1989 )....
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...The central question of agency theory becomes: What type of contracts best suit agency relationships of various types ( Eisenhardt, 1989 )? Some contracts focus on the agent's behavior, and others focus on outcomes of interest to the principal....
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...ingly becoming a focal point of research in organization theory ( Eisenhardt, 1988, 1989 )....
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...Adverse selection exists when the agent misrepresents his or her ability or, more generally, does not behave in the manner preferred by the principal ( Eisenhardt, 1989 )....
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...Agency theory applies to relationships in which "one party (the principal) delegates work to another (the agent), who performs that work" ( Eisenhardt, 1989: 58 )....
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Journal Article•DOI•

The resource-based view within the conversation of strategic management

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Joseph T. Mahoney¹, J. Rajendran Pandian¹•Institutions (1)

University of Illinois at Urbana–Champaign¹

01 Jun 1992-Strategic Management Journal

TL;DR: The resource-based approach as discussed by the authors is an emerging framework that has stimulated discussion between scholars from three research perspectives: traditional strategy insights concerning a firm's distinctive competencies and heterogeneous capabilities.

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Abstract: The resource-based approach is an emerging framework that has stimulated discussion between scholars from three research perspectives. First, the resource-based theory incorporates traditional strategy insights concerning a firm's distinctive competencies and heterogeneous capabilities. The resource-based approach also provides value-added theoretical propositions that are testable within the diversification strategy literature. Second, the resource-based view fits comfortably within the organizational economics paradigm. Third, the resource-based view is complementary to industrial organization research. The resource-based view provides a framework for increasing dialogue between scholars from these important research areas within the conversation of strategic management. Resource-based studies that give simultaneous attention to each of these research programs are suggested.

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3,329 citations

Cites background from "Agency Theory: An Assessment and Re..."

...…1986) includes evolutionary economics (Barney 1986b; Nelson and Winter, 1982; Schumpeter , 1950), transaction cost economics (Coase, 1937; Ouchi, 1980; Williamson, 1975); property rights theory (Alchian, 1984; Jones, 1983) and positive agency theory (Eisenhardt, 1989; Jensen and Meckling, 1976)....
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...' (Baumol, Panzar and Willig, 1982 ); property rights are ill-defined (Alchian, 1984); externalities are present (Dahlman, 1979); imperfect (asymmetric) information exists (Eisenhardt, 1989, Yao, 1988); and transaction costs are positive (Williamson, 1991a)....
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Journal Article•DOI•

Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns:

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Lex Donaldson¹, James H. Davis²•Institutions (2)

University of New South Wales¹, College of Business Administration²

01 Jun 1991-Australian Journal of Management

TL;DR: In this article, an empirical test fails to support agency theory and provides some support for stewardship theory, which argues that shareholders interests require protection by separation of incumbency of roles of board chair and CEO.

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Abstract: Agency theory argues that shareholder interests require protection by separation of incumbency of roles of board chair and CEO. Stewardship theory argues shareholder interests are maximised by shared incumbency of these roles. Results of an empirical test fail to support agency theory and provide some support for stewardship theory.

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2,957 citations

Cites background from "Agency Theory: An Assessment and Re..."

...Agency theory specifies mechanisms which reduce agency loss (Eisenhardt 1989)....
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Journal Article•DOI•

Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives

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Amy J. Hillman¹, Thomas Dalziel¹•Institutions (1)

Arizona State University¹

01 Jul 2003-Academy of Management Review

TL;DR: The authors argue that board capital affects both board monitoring and the provision of resources and that board incentives moderate these relationships, arguing that board's incentives moderate the relationship between monitoring and resource dependence.

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Abstract: Boards of directors serve two important functions for organizations: monitoring management on behalf of shareholders and providing resources. Agency theorists assert that effective monitoring is a function of a board's incentives, whereas resource dependence theorists contend that the provision of resources is a function of board capital. We combine the two perspectives and argue that board capital affects both board monitoring and the provision of resources and that board incentives moderate these relationships.

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2,894 citations

Cites background from "Agency Theory: An Assessment and Re..."

...Agency theorists see the primary function of boards as monitoring the actions of “agents”—managers—to protect the interests of “principals”—owners (Eisenhardt, 1989; Jensen & Meckling, 1976; Mizruchi, 1983)....
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Journal Article•DOI•

Modes of Network Governance: Structure, Management, and Effectiveness

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Keith G. Provan¹, Patrick Kenis²•Institutions (2)

University of Arizona¹, Tilburg University²

29 Jun 2007-Journal of Public Administration Research and Theory

TL;DR: In this paper, three basic models or forms of network governance are developed focusing on their distinct structural properties and the tensions inherent in each form are discussed, followed by the role that management may play in addressing these tensions.

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Abstract: This article examines the governance of organizational networks and the impact of governance on network effectiveness. Three basic models, or forms, of network governance are developed focusing on their distinct structural properties. Propositions are formulated examining conditions for the effectiveness of each form. The tensions inherent in each form are then discussed, followed by the role that management may play in addressing these tensions. Finally, the evolution of governance is explored.

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2,891 citations

Cites background from "Agency Theory: An Assessment and Re..."

...A critical role for governance in all these sectors, and consistent with principal-agent theory, is to monitor and control the behavior of management, who are hired to preside over the day-to-day activities of running the organization (Eisenhardt 1989; Fama and Jensen 1983)....
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...However, despite much progress made by researchers studying networks of organizations over the past 15 years and more, there is still a considerable discrepancy between the acclamation and attention networks receive and the knowledge we have about the overall functioning of networks....
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References

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Open Access

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Journal Article•DOI•

Theory of the firm: Managerial behavior, agency costs and ownership structure

[...]

Michael C. Jensen¹, William H. Meckling¹•Institutions (1)

University of Rochester¹

01 Oct 1976-Journal of Financial Economics

TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.

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49,666 citations

Book Chapter•DOI•

Prospect theory: an analysis of decision under risk

[...]

Daniel Kahneman¹, Amos Tversky•Institutions (1)

University of British Columbia¹

01 Mar 1979-Econometrica

TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.

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Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE

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35,067 citations

"Agency Theory: An Assessment and Re..." refers methods in this paper

...By relying on the works of Kahneman and Tversky (1979), MacCrimmon and Wehrung (1986), and March and Shapira (1987), the organizational researcher can measure risk preference more easily and realistically....
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Journal Article•DOI•

Separation of ownership and control

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Eugene F. Fama¹, Michael C. Jensen²•Institutions (2)

University of Chicago¹, Harvard University²

01 Jun 1983-The Journal of Law and Economics

TL;DR: The authors argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. But they do not consider the role of decision agents in these organizations.

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Abstract: ABSENT fiat, the form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs.1 Our goal is to explain the survival of organizations characterized by separation of "ownership" and "control"-a problem that has bothered students of corporations from Adam Smith to Berle and Means and Jensen and Meckling.2 In more precise language, we are concerned with the survival of organizations in which important decision agents do not bear a substantial share of the wealth effects of their decisions. We argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. We contend that separation of decision and risk-bearing functions survives in these organizations in part because of the benefits of specialization of

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14,045 citations

Book•

Markets and Hierarchies: Analysis and Antitrust Implications

[...]

Oliver E. Williamson

01 Jan 1983

13,643 citations

Book•

Organizations in Action

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James D. Thompson