Agency theory and the financial crisis from a strategic perspective
by Alan D. Smith
International Journal of Business Information Systems (IJBIS), Vol. 5, No. 3, 2010

Abstract: The financial credit crash of 2007 and 2008, based on various explanations of debt derivatives and housing bubbles that caused many financial institutions to lend money to those who could not repay, has its foundations in agency theory and faulty business strategy. Agency theory is the conflict of interest that may arise between the agent (the Chief Executive Officer or CEO or other managers) and the principals (shareholders). This conflict can cause the firm – and ultimately, the shareholders – to lose money. In the eyes of the shareholders, the goal of every CEO should be to maximise shareholder wealth. Agency theory comes into play when the CEO does not act in the best interest of the shareholders. Investment banks are now trying to recoup funds from homeowners, only to find out that they cannot afford the payments; they are then stuck with a foreclosed home and have to try to sell it in an economy where house values have dropped in the last year. Examples from the mortgage, financial and automotive industries are cited to illustrate certain points associated with agency theory-based problems.

Online publication date: Wed, 03-Mar-2010

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