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Asymmetric Information and Agency Costs Theory

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Are asymmetric information and agency cost theories relevant for the modern corporation?

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Solution Summary

This solution provides information about whether asymmetric information and agency cost theories are relevant for the modern corporations. Note this solution is adequately referenced.

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Hello Student,

The theory of asymmetric information and agency cost is one which has existed for years in the corporate financing world. In particular, in the last decade there were several corporate scandals including the famous Enron which had arisen, in part, because of information assymetry problems. In order to answer a question of this nature, the first thing you may want to seek to do is establish an understanding of the two concepts - that of asymmetric information and agency cost. After which you may seek to debate on its relevance back in the days as compared to now.

Assymetric Information

Assymetric information by its definition results from a "situation in which one party in a transaction has more or superior information compared to another party. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge." You may want to note further that, information Asymmetry can lead to two main problems:

1. Adverse selection - immoral behavior that takes advantage of asymmetric information before a ...

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