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Theory of the Firm: Managerial Behavior Essay

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We focus in this paper on the behavioral implications of the property rights specified in the contracts between the owners and managers of the firm. The possibility of monitoring the behavior of the company by means of review of controls has stayed aside in this analysis. In the activity they can use resources for changing the opportunity that the owner possesses to receive the not pecuniary benefits, these activities consist of the budgetary restrictions, audits, formal systems of control, creation of measures of compensation of incentives that serve to join the interests of the manager with those of the external shareholders.

In the examples it is possible to observe that a budgetary restriction derives in the possibilities of control this one has, the account also shows that the different shareholders of the company can restrict the consumption of the manager to low quantities of F ‘. The value of the company is given by V = V – F (M, a) – M and the location of these points for the different levels of M and for a given level spreads in the AEC. The vertical inequality between the FV and curves ECB is M showing the current value of market of the expenses in the future. The increase in the value of the signature that is joined is observed in the wealth of the owner, but his well being was rising in less this, because he was stopping receiving the not pecuniary benefits that before he was enjoying.

Fig. 3. The value of the firm (V) and level of non-pecuniary benefits (F) when outside equity is (1-α), U1, U2, U3 represent owner’s indifference curves between wealth and non-pecuniary benefits, and monitoring (or bonding) activities impose opportunity set BCE as the tradeoff constraint facing the owner. In the study of the expenses of union relevancy does not have the control of the expenses, the owner take responsibility of the costs as a reduction in the wealth of the others. The owner can use resources to assure the external shareholders that it would limit his activities. The expenses costs of union are in use as contractual guarantees that have the books statements audited by a public account, the explicit entail against the irregularity on the part of the manager and contractual limitations on the power of decision of the manager.

The ideal scales of the company are the activities of follow-up and entail. If we leave the external owners to do practices of monitoring to limit the expenses of the not pecuniary manager and allow that the administrator should take part in activities of bails to assure a certain consumption the owners of F doing an expansion. The union, the exterior action of monitoring and the incentives are for the levels of these practices with which it comes near to the optimization. The company produces the last one of a way to maximize his value. The difference between V *, it is the result of acting under zero and costs of monitoring. The answers consist of the fact that the costs of agency will be positive always and when the costs of monitoring are positive. We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent.

The size of the costs of agency can change depending the company, not always it is the same thing, this depends on the preferences of the administrators, the simplicity with which they can establish his own preferences opposite to the maximization of the value in the capture of decisions and the costs of the activities of follow-up and entail. In the monopolistic competition and the managerial behavior is observed that the competition of the markets in the product limits itself to the behaviors of the executives and his way of operating towards a maximization of the ideal value. The owners of a firm with power of monopoly have the same incentives to limit the differences of the manager for the maximization of the value, as other owners of competitive companies.

The role of the limited responsibility it is said that is one of the most showy qualities of the companies of form vis-à-vis individual owners or companies, is the characteristic of the claims of responsibility limited in the capital of the companies; without these points of importance all the investors in the purchase of actions of a joint-stock company it would be really responsible with the whole weight of his personal heritage on the debts of the corporation. If the costs of agency generated by the existence of external owners are positive, that the absent owner (the shareholders) will pay to sell to another owner who can avoid these costs. With the owner – manager’s financial structure it will have a strong incentive to take part in the practices of investment that promise big usefulness if it is done effectively, even if they have one very low probability of success.

If it goes out well, most of the earnings is captured, if they go out badly the creditors support most of the costs. The publicly held business corporation is an awesome social invention. Millions of individuals voluntarily entrust billions of dollars, francs, pesos, etc. of personal wealth to the care of managers on the basis of a complex set of contracting relationships, which delineate the rights of the parties involved. The growth in the use of the corporate form as well as the growth in market value of established corporations suggests that at least, up to the present, creditors and investors have by and large not been disappointed with the results, despite the agency costs inherent in the corporate form. Agency costs are as real as any other costs. The level of agency costs depends, among other things, on statutory and common law and human ingenuity in devising contracts.

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