Financial and Non-Financial Policies: An Examining of Agency Theory

Jaja Suteja, JS (2017) Financial and Non-Financial Policies: An Examining of Agency Theory. Financial and Non-Financial Policies: An Examining of Agency Theory, 15 (20). ISSN 0972-7302


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In running the company operations, oftenly the actions of the managers, instead of maximizing the welfare of the owners (stockholders) as the main purpose of the company exists or is established, but rather tend to increase their own welfare. The decisions they make tend to benefit the insiders, for example expanding to improve the status and salary, as well as imposing costs on companies. These conditions will result in the emergence of a wide degree of difference of interests between stockholders and the insider. The conflict caused by the separation between ownership and control functions in financial theory called agency conflict. Agency theory suggests a number of mechanisms that can be used to oversee the agency conflict, including an increase in insider ownership and debt financing. Jensen and Meckling (1976) says that the use of instruments of insider ownership is able to align the interests of managers and other stockholders, this policy led to increased managerial control of the parties. Meanwhile, according to Grossman and Hart (1982), agency problems can be reduced by using debt policy instruments, the use of this instrument would be binding on the company in a “contract” with debtholders, the company burdened with the obligation to make interest payments and principal repayments on a periodic basis. The increased percentage of insider would increase the risk of non-diversifiable debt (Friend, et al. 1988; Bathala, et al. 1994). They say that a high percentage of insider would be pushed to choose risky projects in the hope to gain higher profits. To finance the project, insider choose financing through debt, in the hope they can divert the underwriting risk to the creditor if the project fails. On the other hand, if the investment project is successful, stockholders will receive the results of the residue because creditors will only be paid for certain, namely in the form of flowers. However, the use of debt is too high which can increase the risk of bankruptcy (Banckruptcy risk) and financial difficulties (financial distress). In order to overcome the disadvantages of the emergence of the use of debt and the percentage of too large insider, it takes a control of mechanism (Fama and Jensen, 1983; Agrawal and Mandelker, 1990).

Item Type: Article
Subjects: JOURNAL
Depositing User: Mr fahmi aldi
Date Deposited: 16 Aug 2018 03:05
Last Modified: 16 Aug 2018 03:05

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