agency theory eisenhardt, k. m 1980

7/23/2019 Agency Theory EISENHARDT, K. M 1980

http://slidepdf.com/reader/full/agency-theory-eisenhardt-k-m-1980 1/36

Agency Theory: An Assessment and Review

Author(s): Kathleen M. Eisenhardt

Source: The Academy of Management Review, Vol. !" #o. ($an." %&%)" ''. *!

+u,lished ,y: Academy o- Management

Sta,le R/: htt':00www.1stor.org0sta,le02&%

Accessed: 3*3%*23 4:4& T5

RE6ERE#5ES

/in7ed re-erences are availa,le on $ST8R -or this article: htt':00www.1stor.org0sta,le02&%9

se;<cid;'d-*re-erence=re-erences>ta,>contents

?ou may need to log in to $ST8R to access the lin7ed re-erences.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

http://www.jstor.org/page/ info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide rang

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new form

scholarship. For more information about JSTOR, please contact [email protected].

Academy of Management is collaborating with JSTOR to digitize, preserve and extend access to The Academy of Managem

Review.

h // j

http://www.jstor.org/action/showPublisher?publisherCode=aom

http://www.jstor.org/stable/258191

http://www.jstor.org/stable/258191?seq=1&cid=pdf-reference#references_tab_contents


http://www.jstor.org/page/info/about/policies/terms.jsp


http://www.jstor.org/

http://www.jstor.org/stable/258191





http://www.jstor.org/

http://www.jstor.org/action/showPublisher?publisherCode=aom



? Academy of Management Review, 1989, Vol. 14, No. 1, 57-74.

Agency Theory: An Assessment

and Review

KATHLEENM. EISENHARDT

Stanford University

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 in-formation systems,

outcome uncertainty, incentives, and risk and (b) is an empirically valid

perspective, particularly when coupled with complementary perspectives.

The principal recommendation is to in-corporate an agency perspective in

studies of the many problems having a cooperative structure.

One day Deng Xiaoping decided to take

his grandson to visit Mao. "Call me

granduncle," Mao offered warmly.

"Oh, I certainly couldn't do that,

Chairman Mao," the awe-struck child

replied. "Why don't you give him an

apple?" suggested Deng. No sooner hadMao done so than the boy happily

chirped, "Oh thank you, Granduncle."

"You see," said Deng, "what in-

centives can achieve."

("Capitalism,"1984, p. 62)

purposes of this paper are to describe

agency theory and to indicate ways in which

organiza-tional researchers can use its

insights. The pa-per is organized around

four questions that are germane to

organizational research. The first asks the

deceptively simple question, What is agency

theory? Often, the technical style, math-

ematics, and tautological reasoning of the

agency literature can obscure the theory.

More-

over, the agency literature is split into two

Agency theory has been used by scholars

in accounting (e.g., Demski & Feltham,

1978), eco-

nomicsnance

Lal,

ence

ior(e.g.,

and

Yet,it isstill surroundedbycontroversy.

ponents argue that a revolution is at hand

and that "the foundation for a powerful

theory of or-ganizations is being put into

place" (Jensen, 1983, p. 324). Its detractors

call it trivial, dehu-manizing, and even

"dangerous" (Perrow, 1986, p. 235).

Which is it: grand theory or great

sham? The



camps (Jensen, 1983), leading to

differences in interpretation. For

example, Barney and Ouchi (1986)

argued that agency theory emphasizes

how capital markets can affect the

firm, whereas other authors made no

reference to capital markets at all

(Anderson, 1985; Demski & Feltham,

1978; Eccles, 1985; Eisenhardt, 1985).

The second question is, What does

agency theory contribute to organizational

theory? Pro-ponents such as Ross (1973,

p. 134) argued that "examples of agency

are universal." Yet other scholars such

as Perrow (1986) claimed that agency

theory addresses no clear problems, and

Hirsch and Friedman (1986) called it

exces-sively narrow, focusing only on

stock price. For economists, long

accustomed to treating the or-

57

his content downloaded from 114.79.47.36 on Mon, 07 Sep 2015 13:38:52 UTC All use subject to JSTOR Terms and Conditions

ganization

firm,agency

for organizational

theoryisnotsoobvious.

Thethird question

icallyvalid?The powerof the empirical

onagency

nomena

light

"hardlysubjecttriestoexplain

224).Perrow

beingunrealisticallyone-sided

neglect

The finalquestion

are

use

agency

requires

theagency

leverage.

The principal

present

tionsofthetheoryto

andevaluate

overallconclusion

fuladdition

agency

tainty,

novel

and

theory,

mentary

Origins of Agency Theory

During the 1960s and early 1970s,

economists explored risk sharing among

individuals or groups (e.g., Arrow, 1971;

Wilson, 1968). This literature described

the risk-sharing problem as one that

arises when cooperating parties have

different attitudes toward risk. Agency

theory broadened this risk-sharing

literature to include the so-called agency

problem that occurs when cooperating

parties have different goals and di-

58





vision

1973). Specifically,

theubiquitous

oneparty(theprincipal)delegates

other

Agency

shipusing

Meckling,

Agency

twoproblemsthat canoccurin agency

ships.The first is theagency

when

agent

for theprincipaltoverifywhat

tuallydoing.Theproblem

cipalcannotverifythattheagent

appropriately.

sharingagenthavedifferentattitudestoward

problem

maypreferdifferentactionsbecause

ferentrisk preferences.

Because

governing

paland

determining the most efficient contract

govern-ing the principal-agent

relationship given as-sumptions about

people (e.g., self-interest,

bounded

tions(e.g.,

information

which

question

tract

moreefficientthananoutcome-oriented

tract(e.g.,

of propertyrights,market governance)?

view

The agencystructure is applicable

of settings,rangingfrom macrolevelasregulatory

nomena such as blame, impression

manage-ment, lying, and other expressions

of self-interest. Most frequently, agency

theory has been applied to organizational

phenomena


Table 1

Agency Theory Overview

Key idea Principal-agent relationships

should

reflect efficient

organization

of

information and risk-

bearing costs

Unit of Contract between principaland agent

analysis

positivist and principal-agent (Jensen,

1983). The two streams share a common

unit of analysis: the contract between the

principal and the agent. They also share

common assumptions about people,

organizations, and information. However,

they differ in their mathematical rigor,

dependent variable, and style.

Human

assumptions

Organizational

assumptions

Information





assumption

Contracting

problems

Problem

domain

such as

1988; Eisenhardt,

fication

boardrelationships(e.g.,

Kosnik,

tures(e.g.,Argawal& Mandelker,

& Meckling,son, 1985; Eccles,

1988;Zenger,

agency

basic

agent

ior,but

tudes

From its roots in information economics, agency theory has developed along two

lines:

59

Positivist Agency Theory

Positivist researchers have focused on identi-fying situations in which the principal and

agent

arelikelyto have

scribingthegovernance

the agent's

search agent

havefocusedalmost

case of the principal-agent

owners

tions(Berle& Means,

Threearticleshavebeenparticularlyinfluen-

tial.Jensen

ownership

inghowequity

managers'



(1980) discussed

labormarkets

are used

top executives.

scribed

informationsystemthatthestockholders

largecorporations

portunismof topexecutives.

leagues

extended

suchasgolden

ing.

Froma

stream

ing thegovernance

agency

thisinterestas"whycertain

tionsarise."ernance

positiviststream.


come-based contracts are effective in curbing agent opportunism. The argument is that

such contracts coalign the preferences of agents with those of the principal because the

rewards for both depend on the same actions, and, there-fore, the conflicts of self-

interest between princi-pal and agent are reduced. For example, Jensen and Meckling

(1976) described how increasing the firm ownership of the managers decreases

managerial opportunism. In formal terms,

Proposition 1: When the contract between the principal and agent is outcome based, the

agent is more likely to behave in the interests of the principal.

The second proposition is that information sys-tems also curb agent opportunism.

The argu-ment here is that, since information systems in-form the principal about what

the agent is actu-ally doing, they are likely to curb agent oppor-tunism because the

agent will realize that he or she cannot deceive the principal. For example, Fama (1980)

described the information effects of efficient capital and labor markets on manage-rial

opportunism, and Fama and Jensen (1983) described the information role that boards

of di-rectors play in controlling managerial behavior. In formal terms,

Proposition2: Whenthe principal

tionto verifyagent

likelyto behave





At its best,positivistagency

gardedas

more com

1983). However,

nizationalMichaels,

bymicroeconomists

rigor (Jen

agency th

search

terest ("Meet Mike," 1988).

60

Principal-Agent Research

Principal-agent researchers are concerned with a general theory of the principal-agent

re-

lationship,atheorythatcanbe

ployer-employee,lawyer-client,

andotheragencyrelationships

1978). Characteristic of formal theory, the prin-cipal-agent paradigm involves careful

specifi-

cation

logical

In comparison

cipal-agentand,

scholars.

theory

focused

widely

pal-agent

greater

tions.In contrast,

cused

theowner/CEO

ration.

cludesmanymoretestableimplications.

For organizational

provide

ofthe

Rather,

streams

identifiesvariouscontractalternatives,

cipal-agent

themostefficientundervarying

come



andothervariables

Thefocusoftheprincipal-agent

ondetermining

versus

agent.

between

suredoutcome,andanagentwho

averse

behind

whoare

should


capable

shouldberisk neutral.)The approach

plemodel

(e.g., Demski& Felth

simplecaseof complete

principal

Given thattheprinc

behavior,

havioris mostefficient.Anoutcome-based

tract wouldneedlessly

whois assumedto bemorerisk averse

principal.

Thesecondnotknow

Given the

mayormaynothave

agencyproblemarisesbecause

andthe

principal

haved appropriatel

twoaspects

Moral hazard

theagent.

maysimplynot put forth the agreed-upon

That is,

moral hazard occurs when a research scientist

works onapersonal

pany time,butthere

corporatemanagement

scientist

fersto

agent.The argument

claim to have

or sheis hired.Adverse





theprincipal

skills orabilities

while theagent

verse selection occurs when a research scientist claims to have experience in a scientific

spe-cialty and the employer cannot judge whether this is the case.

In the case of unobservable behavior (due to moral hcazard or adverse selection), theprincipal has two options. One is to discover the agent's behavior by investing in

information systems

such as budgeting systems, reporting proce-dures, boards of directors, and additional

layers of management. Such investments reveal the agent's behavior to the principal, and

the situa-tion reverts to the complete information case. In formal terms,

Proposition

tivelyrelatedtobehavior-based

negatively

The other optionis to contracton theoutcomesof the agent's

contractmotivatesbehavior

theagent's

pal,butat

agent.The issue

are only partly a function of behaviors. Govern-ment policies, economic climate,

competitor ac-

tions, technologicalc

cause uncontrollabl

The resulting

not onlythethat must be borne by someone. When outcome uncertainty is low, the costs of shifting

risk to the agent are low and outcome-based contracts are attractive. However, as

uncertainty increases, it becomes increasingly expensive to shift risk de-spite the

motivational benefits of outcome-based contracts. In formal terms,

Proposition 4: Outcome uncertainty is positively related to behavior-based contracts and

nega-tively related to outcome-based contracts.

This simpleagency

in varying

& Feltham,

strom,1979; Shavell,ofprincipal-agent

tween(a) thecost of measuring

the cost of measuring

risk to theagent.

Anumberofextensions

arepossible.

risk-averse

Research

catesthat



61


attitudes.

lessriskaverse(e.g.,

comesmoreattractivetopassrisk totheagent

usinganoutcome-based

astheagentbecomes

creasingly

formal terms,

Proposition 5: The risk aversion of the

agent is positively related to behavior-

based contracts and negatively related to

outcome-based con-tracts.

Similarly, as the principal becomes more

risk averse, it is increasingly attractive to

pass risk to the agent. In formal terms,

Proposition6: The risk aversion

isnegatively

tracts

based

Anotherof goalconflictbetween

(e.g.,

highly

1979) or insituations

wayto selfless

isnogoal

principal

orherbehavior

decreases,

imperative

theissueUnder

behavior-based

tive.In formalterms,

Proposition 7: The goal conflict between

princi-pal and agent is negatively related

to behavior-based contracts and

positively related to out-come-based

contracts.

Another set of extensions relates to the

task per-formed by the agent. For

example, the progam-mability of the task

is likely to influence the ease

of measuring

Programmability

whichappropriatebehaviorbythe

bespecified





a retail salescashier

thanthatofahigh-technology

Theargumentis that thebehavior

gaged

serve

grammed the task, the more attractive are

be-havior-based contracts because

information about the agent's behavior is

more readily de-termined. Very

programmed tasks readily re-veal agent

behavior, and the situation reverts to the

complete information case. Thus, retail

sales clerks are more likely to be paid via

behavior-based contracting (e.g., hourly

wages), where-as entrepreneurs are more

likely to be compen-satedwithoutcome-basedcontracts

ownership).In formalterms,

Proposition

tivelyrelatedtobehavior-basedcontracts

negatively

Another task characteristic is the

measurabil-ity of the outcome (Anderson,

1985; Eisenhardt, 1985). The simple model

assumes that outcomes are easily

measured. However, some tasks re-quire a

long time to complete, involve joint or team

effort, or produce soft outcomes. In these

circumstances, outcomes are either

difficult to measure or difficult to measure

within a practi-cal amount of time. When

outcomes are mea-sured with difficulty,

outcome-based contracts are less

attractive. In contrast, when outcomes are

readily measured, outcome-based contracts

are more attractive. In formal terms,

Proposition 9: Outcome measurability is

nega-tively related to behavior-based

contracts and positively related to

outcome-based contracts.

Finally, it seems reasonable that when

prin-cipals and agents engage in a long-

term rela-tionship, it is likely that the

principal will learn about the agent (e.g.,

Lambert, 1983) and so will be able to

assess behavior more readily. Con-versely,

in short-term agency relationships, the

information asymmetry between principal

and agent is likely to be greater, thus

making out-

62


come-based contracts more attractive. In formal terms,

Proposition 10: The length of the agency rela-tionship is positively related to behavior-based

contracts and negatively related to outcome-based contracts.

Agency Theory and the

Organizational Literature

Despite Perrow's (1986) assertion that agency theory is very different from organization

theory, agency theory has several links to mainstream organization perspectives (see Table





2). At its roots, agency theory is consistent with the clas-sic works of Barnard (1938) on the

nature of co-

operative

on theinducements

ployment

theheartinherent

ences engage

sential

Agency

elsoforganizations.

perspectives

atthe individ

organizational

1981).Also,

asymmetry

participants

enceis that in politicalmodels

resolved

coalitions-the

science.

through

pricemechanism

Agency

tionprocessing

ory(Chandler,

& Lorsch,

tiontheories.Theyassume

boundedlytributedasymmetrically

zation.Theyalsoareefficiency

theyuseefficientprocessing

criterion for choosing

forms(Galbraith,

thetwoistheirfocus:In contingency

searchers

turingofreporting

making responsibilities (e.g., Galbraith, 1973;

Lawrence

theorytheyareconcernedstructuring

fromthese

terns.Forexample,

wewould

organized

Table 2

Comparison of Agency Theory Assumptions andOrganizational Perspectives



Assumption

Self-interest

Goalconflict

Boundedrationality

Informationasymmetry

Preeminenceof efficiency

Risk aversion

Informationasacommodity

63


Usingagency

withwhether

ture are

tives.

control literature(e.g.,

Forexample,

chi's (1979) linking

tionships

susoutcometheory'slinkingtaskprogrammability

surability

hardt,

tionships

iorcontrol,and

outcomes)

Ouchi's

frameworktoinclude

assuming

agency

gruencebetweenpeopleand,therefore,duced

Motivationissuesdisappear.

ences

zationalcontrolliteraturearethe

tionsofprincipalandagent

outcomeuncertainty(Propositions

ties with

(Williamson,

chi(1986), thetheories





interest

have similar

archies roughly correspond to behavior-based contracts, and markets correspond to

outcome-based contracts. However, the two theories arise from different traditions in

economics (Spence, 1975): In transaction cost theorizing we are concerned with

organizational boundaries, whereas in agency theorizing the contract be-tween

cooperating parties, regardless of bound-ary, is highlighted. However, the most impor-

tant difference is that each theory includes unique independent variables. In

transaction cost theory these are asset specificity and small

64

numbers bargaining. In agency theory there are the risk attitudes of the principal and

agent, outcome uncertainty, and information systems. Thus, the two theories share a

parentage in eco-nomics, but each has its own focus and several unique independent

variables.

Contributions of Agency Theory

Agencytheory

ofincentives

thinking(Perrow,

usthatmuch

likeitornot,

theoryalso

common problem structure across research top-ics. As Barney and Ouchi (1986) described

it, organization research has become increasingly

topic,ratherthantheory,centered.

ory remindsusthat commonproblem

doexistacross

sultsfrom one

gration)maybegermane

monproblem

Agency

butionsto organizational

treatment

formationisregarded

cost, andimportant

such asbudgeting,

tors, and

supervision,which

research.

caninvest

controlagent

Anillustrationofthisisexecutive

tion.Anumber

expressed



based e

Stevenson,

1984). However,

isnot

should

including


richer information systems control

managerial opportunism and, therefore,

lead to less perfor-

mance-contingent

Oneparticularlyrelevantinformationsystem

for monitoringexecutivebehaviorsistheboardof directors. From anagency

canbe

holder

boards provide richer information,

compensa-

tion

mance.

ecutives

onknowledge

likely.Executiveswouldthenberewarded

takingrisk/highpotential

beunsuccessful.

richer

likelyto engage

withstockholders'interests.Forexample,

anagencyviewpoint,behaviorssuch

greenmail

to benefitthemanager

ers,arelesslikelywhen

itors

therichnessofboard

suredinterms

quency

subcommittees,

long

managerial

ber

ownership

Asecond

risk implications.

have

prosperity,

outcome, and that future is only partly

controlled

byorganization

fects

gence

vation

tends

ramifications

implications

65





viewed

intermsof inability

isthatoutcomeuncertainty

ences

ence

Verticalintegrationprovidesanillustration.

Forexample,

thattechnological

not affectthe"make or buy" decision

nentsin alargeautomobile

cipal

explain

framework.However,

withagencythinkingif themanagers

tomobile

sumption

relative

nent).Accordingpredictthat sucharisk-neutralprincipal

tively

whichwasWalkerandWeber'sresult.

reverse

thiscase,

limited

uncertainty:

large.In this case,

mayberisk-averse

agency

agers

tainty.Inparticular,

morelikelyto choose

transferringrisk tothesupplying

agency

ersare

havior-based

ecutives

based

Empirical Results

Researchers in several disciplines have

un-dertaken empirical studies of agency

theory. These studies, mirroring the two

streams of theo-retical agency research,

are in Table 3.


to -.-

;5 0

to

U)

to

tj

0

ti -

>

0

u

93

0

00

tm64





to

v

CV)

5

U)

(1)

> 0

(1) U)

(1)

0

66






uia)

0

u

P

C

0

0

ti

tj

ti

0

ts0

04

tj

ti

co

I.-

-U2.1

0

U2

a)

0)

0

6

U2

a) k40 (

U-2

o

CD

CD

a

)

r

-

U2

00

U

2

-

-

>

U2

0

0

-.1

U2:,:

a)



ui

0

-0

U2

U2

a)

a)U2

ui

a)>t)) U2

a) > 0

a)

a)_C:

0

0 >1

U2

a)

a)

0 a) d>

rn

U2

U2a)

U2

U2

I-0-.1

a) a)U 2 J, -

U2



67

This content downloaded from 114.79.47.36 on Mon, 07 Sep 2015 13:38:52

UTC All use subject to JSTOR Terms and Conditions

Results of the Positivist Stream

In the positivist stream, the common

approach is to identify a policy or

behavior in which stock-holder and

management interests diverge and then to

demonstrate that information systems or

outcome-based incentives solve the agency

problem. That is, these mechanisms

coalign managerial behaviors with owner

preferences. Consistent with the positivist

tradition, most of these studies concern

the separation of owner-ship from

management in large corporations, and

they use secondary source data that are

available for large firms.

One of the earliest studies of this type

was conducted by Amihud and Lev

(1981). These re-searchers explored why

firms engage in con-glomerate mergers.

In general, conglomerate mergers are not

in the interests of the stockhold-ers

because, typically, stockholders can diver-

sify directly through their stock portfolio.

In con-

trast,conglomeratemergersmay

to managers

to diversify

mergers are an arena in which owner and

man-ager interests diverge. Specifically,

these au-thors linked merger and

diversification behav-iors to whether the

firm was owner controlled (i.e., had a

major stockholder) or manager

controlled (i.e., had no major

stockholder). Consistent with





agencytheoryarguments

1976), manager-controlled

nificantly

lated)acquisitions

Alongthesamelines,WalkingandLong

(1984) studiedmanagers'

bids.Theirsample

porations

between

takeover

but it may be in the interests of managers

be-cause they can lose their jobs during a

takeover. Consistent with agency theory

(Jensen & Meck-ling, 1976), the authors

found that managers who have substantial

equity positions within

68

theirfirms(outcome-based

likelyto resisttakeoverbids.

Theeffectsof marketdiscipline

lationships

study

(principals)

andgas

tax and

toassessnance

tensive

incentives

withagency

found that long-run reputation effects of the

mar-ket coaligned the short-run behaviors of

the gen-eral partner with the limited

partners' welfare.

Kosnik(1987)examined

mechanism

boardof directors.Kosnik studied

corporations

tween

agency

ticsto

(payinggreenmailis considered

holders'interests).Aspredicted

ory (Fama& Jensen,

that resisted

ofoutsidedirectorsandahigher



outside

Ina

(1987) examined

firmsecurities

tween stockholders and management.

Specifi-cally, they studied the relationshipbetween stock and stock option holdings of

executives and whether acquisition and

financing deci-sions were made consistent

with the interests of stockholders. In general,

managers prefer lower

risk acquisitions

Argawal

sample

acquisitions

1982. Consistent

& Meckling,

(outcome-based



sition and financing decisions that were

more consistent with stockholder interest.

That is, ex-ecutive stock holdingsappeared to coalign managerial

preferences with those of stockhold-ers.

Singh and Harianto (in press) studied

golden parachutes in a matched sample of

84 Fortune 500 firms. Their study

included variables from both agency and

managerialist perspectives.

Consistent with agency theory (Jensen &

Meck-ling, 1976; Fama & Jensen, 1983),the authors found that golden parachutes

are used to coalign executive interests

with those of stockholders in takeover

situations, and they are seen as an al-

ternative outcome-based contract to

executive stock ownership. Specifically,

the authors found that golden parachutes

were positively associ-ated with a higher





probability of a takeover at-tempt and

negatively associated with executive stock

holdings.

Finally, Barney (1988) explored

whether em-ployee stock ownership

reduces a firm's cost of equity capital.

Consistent with agency theory (Jensen &

Meckling, 1976), Barney argued that

employee stock ownership (outcome-

based con-tract) would coalign the

interests of employees with stockholders.

Using efficient capital market

assumptions, he further argued that this

coalign-ment would be reflected in the

market through a

lowercostofequity.Although

directlytest

areconsistent

In summary,

of agency

topexecutives

interests

debtversus

divestitures,

problems

suchasgolden

in press)andexecutive

& Mandelker,

(b) through

(Kosnik, 1987) and efficient markets

(Barney, 1988; Wolfson, 1985). Overall,

these studies sup-

69

port the positivist propositions described

earlier. Similarly, laboratory studies by

Dejong and col-leagues (1985), which are not

reviewed here, are also supportive.

Results of the Principal-Agent Stream

The principal-agent stream is more

directly fo-cused on the contract between the

principal and the agent. Whereas the

positivist stream lays the foundation (that is,



that agency problems exist and that various

contract alternatives are avail-

able),theprincipal-agentstream

mostefficientcontractalternativeinagiven

uation.Thecommon

istouseasubsettask programmability,

outcomeuncertainty

tract is behavior-

lyingassumption

will choose the most efficient contract,

although efficiency is not directly tested.

In one study, Anderson (1985) probed

vertical integration using a transaction cost

perspective

withagency

ined

resentative

sales

electronics

tory variable

culty

amountof nonselling

Consistent

able

sales

In otherstudies,

inedthechoicebased)andsalary(behavior-based)

tionofsalespeople

study

while

agency

dictions.

predictions

tionsystems

andoutcome



by number of

competitors and

failure rates) sig-

nificantly predict

the salary versus

commission

choice.

aswell.

Conlon

tended





ting.Theyusedamultiperioddesign

agency

withagency

foundthat informationsystems

whether

agent's

performance-contingent(outcome-based)

Theyalso

dictions.

Finally,

develop

pricing.

13large

work based

prescribe the

conditions

under which

various

sourcing

bothefficient

framework

(arguably

andthe

contract)

transferpricing

In summary,

agent

informationsystems

cles,1985; Eisenhardt,tainty

ability

time(Conlon

grammability

Moreover,

variety

secondary

and interviews.

Recommenda

tionsfor Agency

Theor

y

Resear

ch

As argued

above, agency

theory makes

con-tributions to

organization

theory, is testable,

and

70



has empirical support.

Overall, it seems

reason-able to urge

the adoption of an

agency theory

perspective when

investigating the many

prob-lems that have a

principal-agent

structure. Five specific

recommendations are

outlined below for

using agency theory in

organizational re-

search.

Focus on

Information

Systems,

Outcome

Uncertainty,

and Risk

McGrath,thatresearch

Using

agency

should

uncertainty,

makethemostuniquecontributionto organiza-

tionalresearch,

piricalattention

searchersplace

orderto advance

newconcepts

as

cal

ances,

Studying

ticularlyopportune

in measuring

worksofKahneman

CrimmonandWehrung(1986), and

Shapira

canmeasure

realistically.

measures

indirectmeasures

teristics

characteristics

MarchandShapira,

Key on Theory-

Relevant Contexts

Organizational

theory usually is

explored in settings

in which the theory

appears to have

greatest relevance.

For example,

institutional and

resource dependence

theories were devel-

oped primarily in

large, public

bureaucracies in

which efficiency may

not have been a

pressing



concern.

thesame

theory-relevant

Agency

whichcontracting

include

tial goal

suchthat agent

ers

als,





uncertainty

theory

and

tries); and

jobsin which

By emphasizing

useagency

leverage

tested.Topicssuchasinnovationand

suchastechnology-based

attractive

between

jobs

cult.

Expand to Richer Contexts

Perrow (1986)andothers havecriticized agency

theoryfor beingfew testable

implications.

Although these

criti-

cisms

search

Thus,

richerandmorecomplexrange

Twoareas

istoapply

tional

asymmetry

tions.Examples

management

andother

blame

theory might

contribute an

overall framework

in which to place

these various forms

of self-interest,

leading to a better

understanding of

when such

behaviors will be

likely and when

they will be

effective.

71



Thesecondareais

pureforms of behavior

described in this

article to a broader

range of con-tract

altematives. Most

research (e.g.,

Anderson, 1985;

Eisenhardt, 1985,

1988) treats contracts

as a dichotomy:

behavior versus

outcome. However,

contracts can vary on

a continuum between

be-havior and outcome

contracts. Also,

current re-search

focuses on a single

reward, neglecting

many situations in

which there are

multiple re-wards,

differing by time

frame and contract ba-

sis.For example,upperlevel

are

such

Both multipleandmixedrewards(behaviorand

outcome) present

empirical

difficulties, but

they

alsomirror reallife.Therichness

ityofagency

searchers

of possible

Use Multiple Theories

Arecent

quently

Theyargued

single

viewof humannature,

theauthors

nizational

yieldsamorerealisticview

Consistent

therecommendation

orywithcomplementary

orypresents

althoughit is valid,

complexity

spectivesplexity.

This point is demonstrated

pirical

the Singh and

Harianto (in press)

and Kosnik (1987)

studies support

agency theory

hypothe-ses, but they

also use the

complementary per-

spectives of

hegemony and

managerialism.

These perspectives

emphasize the power

and po-litical aspects

of golden parachutes

and green-



mail, respectively. Similarly, the studies by

Eisenhardt (1988) and Conlon and Parks

(1988) combine institutional and agency





theories. The institutional emphasis on

tradition complements the efficiency

emphasis of agency theory, and the result is a

better understanding of compen-sation.

Other examples include Anderson (1985),

who coupled agency and transaction cost,

and Eccles (1985), who combined agency with

equity theory.

Look Beyond Economics

The

tionalresearchers

nomics

arecarefuldevelopment

logicalever,muchofthis

menthasalreadybeenaccomplished

theory.For organizational

off now

zational researchers have comparative

advan-tage (Hirsch et al., 1987). To rely too

heavily on

economics

asefficient

style is to risk doing second-rate economics

with-out contributing first-rate

organizational re-search. Therefore,

although it is appropriate to monitor

developments in economics, it is more useful

to treat economics as an adjunct to more

mainstream empirical work by

organizational scholars.

Conclusion

This paper

onagency

theoryisrevolutionaryand

tion (Jensen,1983) andtheotherarguing

theory

lacks

(Perrow,1986). Amorevalidperspective

themiddle.

realistic,



onproblems

this paper

rounding

tional

study

suesfacing

References

Anderson,E. (1985) The salesperson

ployee:A transactioncostanalysis.

234-254.

Amihud,

motivefor conglomerate

ics,12, 605-616.

Argawal,

and corporate investment and financing decisions.

Jour-nal of Finance, 42, 823-837.Arrow, K. (1971) Essays in the theory of risk bearing.

Chi-cago: Markham.

Barnard, C. (1938) The functions of the executive. Cam-

bridge, MA: Harvard University Press.

Barney, J. (1988) Agency theory, employee stock

ownership and a firm's cost of equity capital.

Unpublished working paper, Texas A&M University,

College Station.

Barney, J., & Ouchi, W. (Eds.) (1986) Organizational

econom-ics. San Francisco: Jossey-Bass.

Basu, A., Lal, R., Srinivasan, V., & Staelin, R. (1985)

Sales-force compensation plans: An agency theoretic

perspec-tive. Marketing Science, 4, 267-291.

Berle, A., & Means, G. (1932) The modern corporation

and private property. New York: Macmillan.

Bolton, M. (1988) Organizational miming: When do late

adopters of organizational innovations outperform

pio-neers? Paper presented at the meeting of the

Academy of Management, Anaheim, CA.

Burt, R. (1979) A structural theory of interlocking

corporate directorates. Social Networks, 1, 415-435.

Capitalism in the making. (1984, April 30) Time, p.

62.

Chandler, A. (1962) Strategy and structure. New York:

Dou-bleday.

Conlon,E.,& Parks,J. (1988) Theeffectsofmonitoring

traditiononcompensation

on principal/agentdyads.



72

This content downloaded from 114.79.47.36 on Mon, 07 Sep 2015 13:38:52UTC All use subject to JSTOR Terms and Conditions

ceedings (pp. 191-195).

Anaheim, CA:

Academy of Man-

agement.

Cyert, R., & March, J.

(1963) A behavioral

theory of the firm.

Englewood Cliffs, NJ:

Prentice-Hall.

Dejong, D., Forsythe, R.,

& Uecker, W. (1985)

Ripoffs, lemons and

reputation formation

in agency

relationships: A lab-

oratory market study.

Journal of Finance, 50,

809-820.

Demski, J. (1980) A

simple case of

indeterminate

financial reporting.

Working paper,

Stanford University.

Demski, J., & Feltham,

G.

(1978) Economic

incentives

in bud-

getarycontrolsystems.AccountingReview,

Dornbusch,S.,& Scott,W.R.(1974) Evaluation

erciseEccles,

J. Pratt & R.

Zeckhauser (Eds.),

Principals and agents:

The structure of

business (pp. 151-186).

Boston: Harvard Busi-

ness School Press.

Eisenhardt, K. (1985)

Control:

Organizational and

economic approaches.

Management Science,

31, 134- 149.

Eisenhardt, K. (1988)

Agency and

institutional

explanations of

compensation in

retail sales. Academy

of Management

Journal, 31, 488-511.

Fama, E. (1980) Agency

problems and the

theory of the firm.

Journal of Political

Economy, 88, 288-307.

Fama, E., & Jensen, M.

(1983) Separation of

ownership and control.

Journal of Law and

Economics, 26, 301-

325.

Galbraith, J. (1973)

Designing complex

organizations. Read-

ing, MA: Addison-

Wesley.

Gardner, W., &

Martinko, M. (1988)

Impression manage-

ment: An

observational study

linking audience

character-istics with

verbal self-

presentations.

Academy of Manage-





ment Journal, 31, 42-

65.

Gausch, J., & Weiss, A.

(1981) Self-selection in

the labor mar-ket.

American Economic

Review, 71, 275-284.

Harris, M., & Raviv, A.

(1978) Some results on

incentive con-tracts

with application to

education and

employment, health

insurance, and law

enforcement.

American Eco-nomic

Review, 68, 20-30.

Harris, M., & Raviv, A.

(1979) Optimal

incentive contracts

with imperfect

information. Journal

of Economic Theory,

20, 231-259.

Hirsch, P., & Friedman,

R. (1986) Collaboration

or paradigm shift?

Economic vs.

behavioral thinking

about policy? In J.

Pearce & R. Robinson

(Eds.), Best papers

proceedings (pp. 31-

35). Chicago: Academy

of Management.

Hirsch, P., Michaels, S.,

& Friedman, R. (1987)

"Dirty hands" versus

"clean models": Is

sociology in danger of

being seduced by

economics? Theory

and Society, 317-336.

Holmstrom, B. (1979)

Moral hazard and

observability. Bell

Journal of Economics,

10, 74-91.

Jensen, M. (1983)

Organization theory

and methodology. Ac-

counting Review, 56,

319-338.

Jensen, M. (1984)

Takeovers: Folklore

and science. Harvard

Business Review, 62(6),

109-121.

Jensen, M., & Meckling,

W. (1976) Theory of

the firm: Man-agerial

behavior, agency costs,

and ownership

structure. Journal of

Financial Economics, 3,

305-360.

Jensen, M., & Roeback,

R. (1983) The market

for corporate control:

Empirical evidence.

Journal of Financial

Econom-ics, 11, 5-50.

Kahneman, D., &

Tversky, A. (1979)

Prospect theory: An

analysis of decisions

under risk.

Econometrica, 47, 263-

291.

Kosnik, R. (1987)

Greenmail:

A study

in board

performance

in corporate

governance.

Administrative

Science Quar-

terly, 32, 163-185.



Lambert, R. (1983)

Long-term contracts

and moral hazard.

Bell Journal of

Economics, 14, 441-

452.

Lawrence, P., & Lorsch,

J. (1967) Organization

and environ-

ment.Boston:Divisionof

School.

Leatherwood,

Effects onpersistenceinaproject.AcademyofManage-

mentJournal,30,836-848.

MacCrimmon,

management

March, J. (1962) The

business firm as a

political coalition.

Journal of Politics, 24,

662-678.

March,J.,

risk and

March,J.,&Simon,

Wiley.

McGrath, J., Martin, J.,

& Kukla, R. (1982)

Judgment calls in

research. Beverly Hills,

CA: Sage.

MeetMikeJensen,the

February

Mitnick,B.(1986) Thetheoryofagency

analysis.

burgh.

Ouchi, W. (1979) A

conceptual framework

for the design of

organizational control

mechanisms.

Management Sci-ence,

25, 833-848.

Pearce, J., Stevenson, W.,

& Perry, J. (1985)

Managerial com-

pensation based on

organizational

performance: A time

series analysis of the

effects of merit pay.

Academy of

Management journal,

28, 261-278.

73



Perrow, C. (1986)

Complex

organizations. New

York: Ran-dom

House.

Pettigrew, A. (1973) The

politics of

organizational

decision making.

London: Tavistock.

Pfeffer, J. (1981) Power

in organizations.

Marshfield, MA: Pitt-

man.

Pfeffer, J., & Salancik, G.

(1974) Organizationaldecision making as a

political process: The

case of a university

budget. Administrative

Science Quarterly, 19,

135-151.

Ross, S. (1973) The

economic theory of

agency: The princi-





pal's problem.

American Economic

Review, 63, 134-139.

Shavell, S. (1979) Risk

sharing and incentives

in the principal and

agent relationship. Bell


10, 53-73.

Singh, H., & Harianto,

F. (in press)

Management-

board re-

lationships, takeover

risk and

the

adoption of golden

para-

chutes: An empirical

investigation.

Academy

of Manage-

ment Journal.

Sitkin, S. (1987) Secrecy

in organizations: The

limits of legit-imate

information control.

Working paper,

University of Texas,

Austin.

Spence, A. M. (1975) The

economics of internal

organization: An

introduction. Bell


6, 163-172.

Spence,A.M.,& Zeckhauser,R. (1971) Insurance,

tion,andindividualaction.AmericanEconomic

61,380-387.

Thompson, J. (1967)

Organizations in

action. New York: Mc-

Graw-Hill.

Ungson, G., & Steers, R.

(1984) Motivation and

politics in executive

compensation.

Academy of

Management Re-view,9, 313-323.

Walker,G.,& Weber,D.(1984) A transactio

tomake-or-buydecisions.Administrativ

terly,29,373-391.

Walking, R., & Long, M.

(1984) Agency theory,

managerial welfare,

and takeover bid

resistance. The Rand


15, 54-68.

White, H. (1985) Agency

as control. In J. Pratt

& R. Zeck-hauser

(Eds.), Principals and

agents: The structure

of busi-ness (pp. 187-

214). Boston: Harvard

Business School Press.

Williamson, 0. (1975)

Markets and

hierarchies: Analysis

and antitrust

implications. New

York: Free Press.

Wilson, R. (1968) On the

theory of syndicates.

Econometrica, 36,

119-132.

Wolfson,M. (1985) Empiricalevidence

andtheirmitigation

Pratt & R.Zeckhauser(Eds.),Principalsa

structureof business

nessSchoolPress.

Zenger, T. (1988) Agency

sorting, agent solutions

and disecon-omies of

scale: An empirical

investigation of

employment contracts

agency theory eisenhardt, k. m 1980

Documents