Where should decision rights be lodged in organizations? Michael C. Jensen and William H. Meckling (1992) argue that moving a decision away from the inherently best-informed party involves costs in communication and garbling but may lodge it with someone who has better incentives to make good decisions.
In large organization, the group of individuals who own the firm are usually separated from those who manage it. This kind of separation results in confliction of interests in these firms. In other words, problem arises when the objectives of those managing the firm differ from the owners or shareholders. The study makes use of agency theory analyses to address the problem. "There are two parties involved in agency theory: the principal or shareholder and the agent or manager" (Jo E. & Charlie W., 1995). The agents in this case include the directors and divisional managers. It is assumed in this study that the principal's first objective is wealth maximization, while the agents may have other objectives such as growth or sales rather than profit.
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