Masters Degrees (School of Accountancy)

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Browsing Masters Degrees (School of Accountancy) by Subject "Agency cost"

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    Agentskapsteorie
    (Stellenbosch : Stellenbosch University, 2001-12) Du Toit, C. E. (Catherina Elizabeth); De Jager, W.; Stellenbosch University. Faculty of Economic and Management Sciences. School of Accounting.
    ENGLISH ABSTRACT: The most basic principle of agency theory is that an individual will always serve his own interest best. According to Eisenhardt (1989) agency theory describes individuals as rational, risk averse en motivated by egotism. Agency theory also deals with the conflict that exists between different parties in an organization due to people's egoism. This self-interest can lead to goal incongruence if a person is placed in an environment where he has to serve somebody else's interest. Ownership and management vested in the same party until about 130 years ago. These roles were however separated with the development of the modem organization. The principal or owner is now represented by the shareholder and management serves as the agent. The principal thus appoints the agent to serve and manage his interest in the organization optimally. The principal's goal is the maximising of his shareholders' wealth. The agent's goal to carry out his task with the minimum effort and or to obtain maximum benefit for himself. It is thus clear that the goals of the principal and agent might often differ and this will give rise to goal Incongruence. This goal incongruence may give rise to some managerial actions which will be detrimental to optimal value of the company. The agency conflict, which is caused by man's self interest, manifests in the modem organization in a number of ways. These are referred to agency problems in this assignment. Agency problems are found both on a micro- and macroeconomical level. Agency cost is the sum of the difference between the real and optimal value of the company, the monitoring costs of the principal and the bonding costs of the agent. This cost is to the disadvantage of the principal and might even be to the disadvantage of the agent. It is thus essential that agency conflict and agency costs are reduced to a minimum. A number of measures are taken to address the agency problems and to reduce their negative effect on the organization. None of these measures will be efficient enough ifused in isolation. An optimal combination of solutions will depend on the company's specific circumstances. An empirical study was conducted to determine to what extent the agency problems manifest during the demutualisation of a big insurance business. The measures taken to address these problems were also investigated as well as the extent to which these were successful.