...CORPORATE GOVERNANCE The need for corporate governance is not something typical to our country or economy .even in countries where regulatory mechanism are more demanding in their content and more vigilant in its implementation. Flagrant violation under the corporate veil have generated the demand for better governance . The advent of information age has created an awakened shareholders , vigilant public and almost predatory journalistic fervour. Depending upon the model of corporate disclosure followed by different legal framework, right to information has forced corporation to divulge more than they ever did. Corporate governance is derived from Latin term ‘corpus’ which means ‘body’. governance means administering the process and system placed for satisfying stakeholders expectations . when the two terms are combined it together brings out set of system procedures , policies , practices , standards put in place by a corporate to ensure that relationship with various stakeholders is maintained in transparent and honest manner. One of the basic feature of corporate governance is that there is a separation of ownership and management. The board of directors work and operate as trustee and agent of shareholders and they have to safeguard the interest of shareholders and other stakeholders It may also be considered as a network of legal provisions , regulations, practices to bring accountability and transparcy in functioning of the body corporate. It specifies the distributions...
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...The Development of Modern Finance "A Short History of Value" David Roubaud & Jean-Charles Bagneris 10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured by its beta coefficient • The model calibrates the risk-return relationship • Simple, elegant and linear model => big success • Low explaining power (strong assumptions) • Alternative models are difficult to use 1 The Development of Modern Finance 2 Financial Markets Efficiency "At any given point in time, assets prices on financial markets account for all available information." • Strong assumptions on: – markets organization – investors behaviour • One consequence of EMH is Random Walk Hypothesis • Assumptions are not always true: 3 forms of efficiency (strong, semi-strong, weak) The irrelevance of financing and dividends decisions In a world without taxes and with perfect financial markets...
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...Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”. Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice. • “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”. Watts and Zimmerman start their book with a fundamental statement of The Role of Theory (Chapter 1).They asserts that the objective of positive accounting theory is to explain and predict accounting practice,(p.2) “Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected. For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against...
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...Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”. Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice. • “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”. “Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected. For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against such a standard, even though the standard has already been released. Testing these theories provides evidence that can be used to predict the impact of accounting regulations before they are implemented. PAT has an...
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...Links between Ghoshal's article, Agency Theory and the 2008 Global Recession. We are all too familiar with the mayhem caused by the global financial crisis; we are still recovering from the after effects of this mayhem. In this essay I will try to investigate the relationships between the Agency theory, Ghoshal’s article on how bad management theories are destroying good management practices and the Global Financial Crisis of 2008. I will start off by introducing the Agency theory and looking at some of its pros and cons, then I will go on to relate the theory to the causes of the global financial crisis of 2008 and finally show how some of the actions based on the Agency theory could have been the foundations of the meltdown. I will then talk about how Ghoshal, in his article, talks about the complete amoral education and scientific measurement methods of the new age management schools which are fueling an ever increasing mistrust between the stakeholders and management. “Agency Theory concerns how two parties in a contractual relationship may interact depending on their attitude towards risks and whether their individual goals align” (Jon Tan, 2009). The agency theory sees two problems that can occur in an agency relationship where one party (stakeholder) delegates work to the agent. The first problem arises when the desired goals of the principal (stakeholder) are not aligned with those of the agent and it is difficult or expensive for the principal to verify what the...
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...This paper discusses the way in which sociologists use critical thinking to de-familiarise common sense assumptions about social life while discussing specific terms such as the sociological imagination, empirical data and the social theory. This essay draws upon the issue of suicide among males living in remote Australian areas as a broad social issue apposed to being a private trouble of the individual. We tend to view certain experiences in our lives as a single private issue. However, this trouble can be viewed as a wider social problem. The sociological imagination is a sociological perspective which observes the world in a critical way and makes clear links between the private problems of the individual and important social issues (Scott & Marshall 2008). Anthony Giddens (1986:13) argues that there are three forms of sensibility that together make up the sociological imagination, these include; historical, anthropological insight and critical thinking. Sociologists use critical thinking to debunk every day common sense assumptions about human behaviour and social life (Mills 1959:2). For example; suicide among males in Australia may be viewed as a private problem of the individual. However, a high percentage of these males live in remote areas compared to those who live in major cities (Australian Bureau of Statistics 2011, Australian Social Trends, Cat. No. 4102.0, Australian Bureau of Statistics, Canberra), which in fact suggests that this issue in fact is a wider...
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...Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”. Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice. • “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”. “Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected. For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against such a standard, even though the standard has already been released. Testing these theories provides evidence that can be used to predict the impact of accounting regulations before they are implemented. PAT has an economic focus and seeks to...
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...Criminal Justice System Humberto Garcia CJA/204 January 13.2014 David Mitchell, MPA Criminal Justice System To talk about criminal justice is important to define crime, its relationship to the law, and the two most common models of how society determines which acts are criminal. Also is important to describe the government structure as it applies to the criminal justice system. Furthermore, identifying the choice theories and their assumptions in regards to crime is important. As well as describing the components of the criminal justice system and the criminal justice process. In addition, identifying the goals of the criminal justice system is essential when talking about criminal justice, and addressing thoughts on whether the criminal justice system is really a system. Defining a crime and its relationship to the law is an important component when talking about criminal justice. In fact, according to University of Phoenix, CJi Interactive, crime can be defined as “conduct in violation of the criminal law of the state, the federal government, or local jurisdiction, for which there is no legally acceptable justification or excuse.” Meaning, that every crime depends on the location of the person who broke the law, which the same suggest that a person’s behavior may not be consider a crime depending on the status of the person who committed the crime, and even why this person broke the law. Consequently, society determines which are criminal acts...
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...Dividend policy theories (By Munene Laiboni) 1. Introduction: Dividend policy theories are propositions put in place to explain the rationale and major arguments relating to payment of dividends by firms. Firms are often torn in between paying dividends or reinvesting their profits on the business. Even those firms which pay dividends do not appear to have a stationary formula of determining the dividend payout ratio. Dividends are periodic payments to holders of equity which together with capital gains are the returns for investing in a firm’s stock. The prospect of earning periodic dividends and sustained capital appreciation are therefore the main drivers of investors’ decisions to invest in equity. In this paper, we explore various theories which have been postulated to explain dividend payment behavior of firms. Major Schools of thought: At the heart of the dividend policy theories discussion are two opposing schools of thought: One side holds that whether firms pay dividends or not is irrelevant in determining the stock price and hence the market value of the firm and ultimately its weighted cost of capital. In retrospect, the opposing side holds that firms which pay periodic dividends eventually tend to have higher stock prices, market values and cheaper WACCs. The existence of these two opposing sides has spawned vast amounts of empirical and theoretical research. Scholars on both sides of the divide appear relentless on showcasing the case for their arguments. Several...
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...or effectively to the demands of the environment, then the individual is criminal or maladaptive. Other people define crime that any wrongdoing and action against the law of God whether as revealed in the Bible, the Koran, or the Torah which naturally recognize as against God’s will irrespectively of what the State of law say it is still a crime. My definition of a crime is any unethical behaviors, actions that a person committed against the law whether it is the State, Federal government, local jurisdictions, and the law of God that causes any harm, injury, or death to other people, to property, and to the society is a crime. Theories such as the rational choice theory, sociological, psychological theory, and among others are how the criminal justice system categorizes individuals as criminals. In rational choice theory the assumption is that the offender’s commit crime when they believe...
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...Public interest theory seeks to establish a method of understanding the interests of public groups based on a number of assumptions. Typically actions that are deemed in the public interest generally occur when governments seek to intervene in situations where market failure occurs. Market failure may arise due to monopolies, barriers to entry for new businesses, and information gaps. Public interest theory makes three assumptions. First, interest of consumers is translated into legislative action through operation of the internal marketplace. Secondly, agents will seek regulation on behalf of public interest. The third assumption being that government has no independent role to play in the development of regulation. In 2002 the Sarbanes-Oxley Act was created in America to enforce greater regulation and compliance for financial reporting and corporate governance. This Act was created in response to corporate scandals involving larger companies like Enron and Tyco International, and thus public interest theory suggests the government’s response was as a result of market failure due to inaccurate auditing and accounting procedures. The premise of private interest theory is that governmental bodies and political leaders use their power to coerce businesses through taxation, regulation, and subsidies. The Basic assertion of privation interest theory is the law of diminishing returns which exists between group size, and costs of using political process. A second assumption is government...
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...Agency theory is controversial and essential theory in accounting, economic and finance sphere. The theory raises a problem of agency relationship, in which, cooperating parties- principal and agent, have different goals and division of work. Agency theory arises two problems: the difficulty of verifying what the agent is actually doing, and the conflict between goals and desires of the principal and agent (Eisenhardt, 1989). Agency theory is based on two different approaches: positivist agency theory and the principal-agent research. The first one describes the governance mechanism that limits the selfish behavior of the agent. Positivist agency theory identifies two propositions including governance system. If the contract between the principal and the agent is based on outcomes, there is a high probability that the agent will act in the interest of the principal. In addition if the principal has information to verify behavior of the agent, then the agent will act in the interest of the principal. The second one, principal-agent stream, contains more testable implications than the positivist theory. There are several things like goal conflict, easily measurable outcome, and the assumption that the agent is more risk averse than the principal, that are assumed in principal-agent research. The main difference between these two theories is that the positivist agency theory identifies certain contract alternatives and principal-agent theory indicates which contracts are the...
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...Agency Theory: A brief Review by N. Waweru The agency theory assumes that there exists a contractual relationship between members of a firm. It recognises the existence of two groups of people; principals or superiors and agents or subordinates. The principals will delegate decision making authority to the agents and expect them to perform certain functions in return for a reward. Both the principals and the agents are assumed to be rational economic persons motivated solely by self-interest but may differ with respect to preferences, beliefs and information (Jensen and Meckling, 1976). The principal/agent relationship can exist throughout any organisation and usually starts from the shareholder-director and ends with the supervisor-shop floor worker (Figure 1.1). In an organisation context, which involves uncertainty and asymmetric information, the agent’s actions may not always be directed to the best interests of the principal. Agents’ pursuit of their self-interest instead of those of the principal is what is called the agency problem (Jensen and Meckling, 1976). To counter this behaviour, the principal may monitor the agents’ performance through an accounting information system. The owner can also limit such aberrant behaviour by incurring auditing, accounting and monitoring costs and by establishing, also at a cost, an appropriate incentive scheme (Jensen and Meckling, 1976). According to Jensen (1998), agency theory seeks to understand: (1) how to assign decision making...
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...systems and processes help a company to monitor and assess risk, optimize performance, create value and provide accountability. a) A narrow definition which consistent with agency theory focuses on relationship between company and shareholders. 2. OECD: a system a company can be directed and controlled, specify rights, responsibilities and rules; set and achieve objectives and monitor performance. b) A board definition consider relationship between company and stakeholders 3. Agency theory c) A contract under which one or more person engage another person or persons to perform some service on their behalf d) Agency problem rise because of the conflict of interest between principle and agent e) Three specific problems: i. Managers try to maximize their wealth at the expense of shareholders ii. Tendency for management to focus on short-term performance iii. Different attitude of managers and shareholders towards risk f) Corporate governance structures, policies and relationships can help to overcome these three related agency problems iv. Independent board of directors v. Independent board chair vi. Independent board subcommittees such as audit, remuneration and nomination 4. Stakeholder theory g) Reject the only important relationship is shareholders and managers, but consider from a much broader perspectiveshareholder is only one part of the group h)...
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...Corporate Governance This article discusses several theories, practices, themes and barriers in order to raise issues that might move corporate governance research forward, while at the same time providing a way to showcase cutting-edge research models and theories. Corporate governance mechanisms provide shareholders some assurance that managers will strive to achieve outcomes that are in the shareholders’ interests. Shareholders have both internal and external governance mechanisms to help bring the interests of managers in line with their own. Internal: an effectively structured board, compensation contracts that encourage a shareholder orientation, and concentrated ownership holdings that lead to active monitoring of executives. External: the market for corporate control. A multi-theoretic approach to corporate governance is essential. Researchers face a considerable challenge in determining those settings that best fit the assumptions in a given theory. Agency Theory Agency theory is the overwhelmingly dominant theoretical perspective applied in corporate governance studies. The assumption given in the agency theory is that those managers are self-interested, and a context in which those managers do not bear the full wealth effects of their decisions. The popularity of agency theory is likely due to two factors: first, it is an extremely simple theory, in which large corporations are reduced to tow participants—managers and shareholders---and the interests of each...
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