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Discussion

Discuss About The Earnings Management And Ownership Structure?

A rapid progress has been observed in the property rights, finance and agency theory for developing an ownership framework in the organization. Moreover, the accounting theories elaborate the determination of some specifications and optimal capital structure. This is in consideration to credit agreements concept, company theories and supply side regarding extensiveness of the market problem (Agoglia et al. 2017). In account of the same, agency theory anticipates to elaborate that the manager or owner of the organization gains mixed financial structure. This includes equity claims and debts. This supports in choosing activities set for organization in a way that total revenue of the organization is less.

 It might be the case that he was the only owner and the findings are independent devoid of the fact that the organization has its operation in monopolistic market or within competitive products. Agency theory elaborates the reasons for which the managers are failing to increase the company value which is increasingly consistent with efficiency (Baik et al. 2015). The intention of this essay is to evaluate the managerial behavior, agency costs and ownership structure which will support in elaborating agency theory from formal peer reviewed article. The article is chosen in the essay for elaborating accounting theories implication within the company is “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure”. 

The article has an objective of maintaining an ownership structure theory for the organization which centers on property rights theory, agency and finance theory. The article also elaborated the concept of agency cost, elaborated the relationship for control issue and investigated the agency cost nature (Beaudoin, Cianci and Tsakumis 2015). It explained existence of outside equity and debt in the organization. In addition, the article conducted an innovative analysis of the organizations that signified effectiveness of their evaluation process. Such evaluation is conducted to reveal the factors affecting the insurance and generation of equity and debt.

The article revealed that agency relationship acts as a contract in which more than one individual gets associated with other person (agent) for offering some service on the behalf of the agent (Briamonte et al. 2017). This offers authority of decision making to the agent. In a situation where the contractual parties involved in the relationship acts as utility maximizers there is high chance that they may not act towards the principal’s best interests. The article also elaborated that agency cost is related with residual loss so an agent’s bonding expenses and supervising expenses are provided by the principal.

Agency Costs of Equity

Agency theory is implemented by organizations with increased efforts within every management level. This theory is implemented within universities, mutual organizations, cooperatives, government authorities and unions. The article centered on analysis of agency costs revealed from contractual agreements conducted by the owners and the company’s top management (Devers and Sanders 2016). It is evaluated that people deal with normative issues taking into account that just stocks and bonds can be issued as claims. This investigates the incentives collected from all the contractual parties and the aspects entering in equilibrium contractual form determination. This explains the relationship between the company’s manager (agent) and the outer equity and debt holders (principals).

If a wholly owned organization is managed by an entrepreneur, the person can make operating decisions which can increase its utility (Dutta and Fan 2014). Including the outside equity can develop agency costs due to interest’s divergence for the reason that principal then just deals with these expenses. This is for attaining non-pecuniary benefits that can further facilitate managers in attaining utility maximization. For this reason, it is observed from the article that the managers focus on increasing company size in case gross value increase fails because of some incremental loss (Ferri, Zheng and Zou 2017). This is related with the implementation of additional fringe benefits. This is due to his lessening fractional interests within the organization. The article review explained that there is a considerable role of monitoring and bonding agreements in decreasing agency costs in the organization. For example, in certain cases the equity market is highly competitive and maintains unbiased estimations considering impacts of expenditures. The prospective consumers will remain indifferent for both of the contracts. First contract explains an organization’s share price at a total price with having no rights to control or supervise perquisites developed by the managers. Additionally, existence or size of agency cost is dependent on monitoring expenses nature, the manager’s intention of attaining non-pecuniary benefits and on supply of potential managers. The managers are able to finance the overall company with their personal wealth (Dutta and Fan 2015).

The article investigated that agency costs encompassing the economic bonding expenses and residual loss presents an unavoidable result in agency relationship. It is also explained that some agency costs are decreased for the decision maker attains advantages from decrease in agency expenditures. Additionally, it is also evaluated that certain security analysis conducts in the company decreases the agency costs associated with ownership separation. This includes expenses and control that are socially productive (Ge and Kim 2014). Agency theory can be implemented in big and modern organizations whose managers have no equity. This accounting theory supports development of positive analysis regarding increased supply within markets. Moreover, elaboration concerning a positive welfare enhancement from increase in certain claims results in emergence of new basic contingent options or claims. This can be deemed as analysis of demand conditions in new markets.

Corporate Ownership Structure Theory

In comparison to capital structure, the ownership structure elaborates that certain vital variables must be determined which includes relative amounts of debts and equity along with a part of equity maintained by the manager (Indjejikian et al. 2014). The article elaborated that till the time the capital markets remain effective the cost of assets including outer equity and debt will indicate unbiased anticipations of supervising expenses. This will include redistributions that can face risks from agency relationships. Moreover, the selling manager might deal with agency costs. From the viewpoint of managers and owners, the maximum part of outside funds should be gathered from equity for maintaining a particular level of internal equity. This can result in decreasing overall agency costs.

Agency costs is observed to have a great effect on the ownership structure of the organization. Changing effects of ownership variables are analyzed for revealing the agency cost impacts that takes place. The organization uses sales-to-asset turnover for making sure whether the management is boosting shareholder’s wealth in an efficient way. They also signify that sales increases because of better use of company’s resources which in turn can lead to shareholders’ wealth maximization and decreased agency costs (Lamboy-Ruiz, Cannon and Watanabe 2016). One more major use of agency theory in the company encompass free cash flows and growth opportunities which is present within the organization. This is in alignment with the situation that a manager has increased cash flows that can be used within perquisites. Moreover, the management ensures high dividends that is considered to be compromising from the perspective of the organization. This also signifies poor external regulation forces as the company do not consider visiting the financial market in order to obtain capital for all the projects. Conversely, in situation where the CEO focuses on shareholder value maximization, the individual might become non-executive directors within other boards.

According to the provided article, it could be stated that the large organizations are individually owned with a minute amount of capital on the part of the owners in return for 100% equity. This is due to the fact that there is strong relationship between the incentive effects and the increasingly leveraged firms. This could be achieved with the help of strong incentives for involvement with activities or investments, which promise enhanced payoffs, if successful, even if the probability of success is minimal (Lovata et al. 2016). Along with this, in few large organizations, it has been identified that the debt insurance accumulates the agency costs, which are the accountability of the managers or the owners. The managers are probable to encounter the bonding costs so that the influence of internal and external monitoring costs could be minimized.

Furthermore, the operating costs and revenues of the organization are identified to be influenced adversely. More specifically, it could be cited that the agency costs, which are endangered due to the availability of external owners, remain positive (Nieken and Sliwka 2015). In addition, it would enable the shareholders to transfer the same to an expert or professional, since this would enable in addressing these costs. The agency costs pertaining to debt constitute of the loss of opportunity wealth, which is due to the influence of debt by taking into consideration the investment decisions of the organization. Along with this, the monitoring and bonding costs on the part of the bondholders and the overall organization contain agency cost, which is associated with debt. Such costs take into account various bankruptcy and reorganization costs.

In accordance with the article, the primary concentration is on the relationship between the shareholders and the top-level management, which overlaps, if the owner performs the role of a manager. In addition, the agency issues within the organization explicate the institutional decisions within various other dimensions. A person, who is full in-charge of the organization and manages it, could undertake operating decisions that takes into account the benefits the individual obtains from the financial returns (Nygaard et al. 2017). In addition, the individual obtains non-monetary aspects related to managerial work for increasing the overall utility. An optimum combination of monetary as well as non-monetary benefit is obtained when the marginal utility is accomplished from the additional money incurred. This is similar with all the non-financial items, which matches with the obtained marginal utility from an additional amount of purchase after tax (Rashid 2015).

The agency costs would not be similar in relation to the interests of the managers or owners and the external stakeholders, if the person sells a minute portion of the residual claims of the organization, which is similar to its own. In addition, the person could carry out the duty of the owner or the manager related to a portion of the expenditures of various non-financial benefits in order to increase the overall utility. On the contrary, it has been identified that the entire effects of wealth related to the estimated expenses would be encountered on the part of the owner until the time the impact hits the market. If the fraction of equity for the owner or the manager rises, the aspect of the claim on the result decreases as well (Tabassum, Kaleem and Nazir 2015). Due to this reason, the owner or the manager is needed to possess reserved corporate resources as a portion of non-financial benefits. Finally, if there is fall in the claims of the individual, the incentive willingness for obtaining anything innovative would fail as well.

Conclusion

The intention of this essay was to evaluate managerial behavior, agency costs and ownership structure which will facilitate in elaborating agency theory from a formal peer reviewed article. It is understood from this article that it has an objective of maintaining an ownership structure theory for the organization. This centers on the property rights, finance and agency theory. The article also elaborated the concepts of agency cost as well as analyzed the association between control issue and separation. It also investigated the nature of agency cost that is developed through existence of outer debt or equity. It is also indicated that agency theory is maintained by all organization with supportive efforts at every management level. The essay also explained that including the outer equity might develop agency costs because of interest divergence. This is for the reason that the principle can then experience just a part of this expense for attaining non-pecuniary advantages that can further increase manager’s unity maximization. Therefore, it can be stated that the article elaborated the ways in which the developed strategies for increasing company size. This is in case the gross value increase remains offset through some incremental loss related with use of additional fringe benefits and decreasing fractional interests in the organization.

References

Agoglia, C.P., Beaudoin, C., Bennett, G.B. and Tsakumis, G.T., 2017. Can Corporate Social Responsibility Counteract Managers' Incentives to Manage Earnings?.

Baik, B., Cho, K., Choi, W. and Kang, J.K., 2015. The Role of Institutional Environments in Cross-Border Mergers: A Perspective from Bidders’ Earnings Management Behavior. Management International Review, 55(5), pp.615-646.

Beaudoin, C.A., Cianci, A.M. and Tsakumis, G.T., 2015. The impact of CFOs’ incentives and earnings management ethics on their financial reporting decisions: The mediating role of moral disengagement. Journal of business ethics, 128(3), pp.505-518.

Briamonte, M.F., Addeo, F., Fiano, F. and Sorrentino, M., 2017. The Effect Of Pyramidal Structures On Earnings Management: Evidence From Italian Listed Companies.

Devers, C.E. and Sanders, W.G., 2016. CEO Compensation.

Dutta, S. and Fan, Q., 2014. Equilibrium earnings management and managerial compensation in a multiperiod agency setting. Review of Accounting Studies, 19(3), pp.1047-1077.

Dutta, S. and Fan, Q., 2015. Earnings Management and Dynamic Incentives.

Ferri, F., Zheng, R. and Zou, Y., 2017. Uncertainty in managers’ reporting objectives and investors’ response to earnings reports: Evidence from the 2006 executive compensation disclosures.

Ge, W. and Kim, J.B., 2014. Boards, takeover protection, and real earnings management. Review of Quantitative Finance and Accounting, 43(4), pp.651-682.

Indjejikian, R.J., Mat?jka, M., Merchant, K.A. and Van der Stede, W.A., 2014. Earnings targets and annual bonus incentives. The Accounting Review, 89(4), pp.1227-1258.

Kazemian, S. and Sanusi, Z.M., 2015. Earnings management and ownership Structure. Procedia Economics and Finance, 31, pp.618-624.

Lamboy-Ruiz, M.A., Cannon, J.N. and Watanabe, O., 2016. The Influence of Ownership and Regulatory Scrutiny on Earnings Management in US Hospitals.

Lovata, L.M., Schoenecker, T.S. and Costigan, M.L., 2016. CEO Characteristics, Compensation and Real Activity Management in Manufacturing Companies. Academy of Accounting and Financial Studies Journal, 20(3), p.103.

Nieken, P. and Sliwka, D., 2015. Management Changes, Reputation, and “Big Bath”—Earnings Management. Journal of Economics & Management Strategy, 24(3), pp.501-522.

Nygaard, A., Biong, H., Silkoset, R. and Kidwell, R.E., 2017. Leading by example: Values-based strategy to instill ethical conduct. Journal of Business Ethics, 145(1), pp.133-139.

Tabassum, N., Kaleem, A. and Nazir, M.S., 2015. Real earnings management and future performance. Global Business Review, 16(1), pp.21-34.

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