Behavioral Agency Theory Analysis

This assignment delves into the concept of Behavioral Agency Theory, contrasting it with traditional Positive Agency Theory. It examines four key factors that shape this theory: the link between performance and motivation, compensation and agent motivation, time discounting, and the trade-off between intrinsic and extrinsic motivation. The analysis highlights how behavioral agency theory provides a more nuanced understanding of executive compensation and its relationship to organizational efficiency.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting Theory and Contemporary Issues
Name of the Student:
Name of the University:
Author Note

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ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Introduction................................................................................................................................2
Journal review – Behavioral Agency theory..............................................................................2
Positive Agency Theory.........................................................................................................2
Behavioral Agency Theory....................................................................................................3
Conclusion..................................................................................................................................3
References..................................................................................................................................5

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ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Introduction
The different accounting theories efficiently lay down the set of methodologies and
assumptions that are utilized for the preparation of a proper financial report. There are
various accounting theories that have efficiently guided the preparation of the financial
reports. These accounting theories have been modified over time in order to suit the current
requirements of the corporate entities and other stakeholders of business.
The journal that has been chosen in this particular study is, “Behavioral Agency
Theory: New Foundations for Theorizing about Executive Compensation” by Alexander
Pepper and Julie Gore.
Journal review – Behavioral Agency theory
The Agency theory is an important economic theory that is utilized by the firms as the
required principles for preparing the financial reports. The agency theory that has been
proposed by this paper promotes the new concept in regards to this particular theory that is,
behavioral agency theory.
The behavioral agency theory pivots around the factors like the performance of the
agent and motivation of the employees in regards to the work. This theory further states that
the demands of the individuals holding the shares of an organization and the respective agents
can only be aligned when the management of the organization has provided enough
motivation to its employees by making the optimum utilization of the available opportunities.
The behavioral agency theory has been established upon those four foundations that have
been identified as the crucial factors that affect the stakeholder behavior (Bosse & Phillips,
2016). These four foundations are as follows:
 Aversion of loss and dependence on reference
 Temporal discounting
 Fairness and inequity aversion
The particular journal that has been chosen, also leads to an introduction of the goal-
setting theory in regards to the agency model based on the grounds of a practical contract
between the agent and the principal (Cui, 2017).

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ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Positive Agency Theory
The positive agency theory points out traditional outlook of the agency theory. This
means that the positive agency theory evidently assumes that the primary aim of the corporate
entities is to seek profit while the agents are both rational in nature and seeks rent.
Furthermore, the positive agency theory also takes into assumption that the principals that
form one of the major elements in the theory to be neutral of risks. This is due to the fact that
the principals can balance their portfolio. The agents on the other hand are exposed to the
risks, this is because the potential effects of wealth in regards to the employment relationship
are significant (Madison caes et al, 2016).
Behavioral Agency Theory
The journal lists out the primary differences between the positive agency theory and
the behavioral agency theory. The positive agency theory puts less stress on the
organizational objective to motivate the agents so that the optimum performance abilities of
the employees can be achieved. The behavioral agency theory on the other hand, proposes
that the maximization of the performance of the agents should in all probabilities be one of
the major objectives of the organization. Furthermore, the agency theory suggests that the
linkage existing in the agent and the principal should reflect the efficiency of the
organization. However, the behavioral agency theory moves away from the analytical
structure set by the traditional agency theory in respect of the three major points. Firstly, the
positive agency theory puts stress on the agency costs that rise due to a misbalanced
relationship between the agent and the principal. The behavioral agency theory on the other
hand stresses on the link between the costs that rise due to the agency problem and work
related performance by measuring them on the basis of efficiency and effectiveness.
Moreover, the behavioral agency theory proposes a softer approach to the agency problem in
comparison to positive agency theory. Lastly, the behavioral agency theory indicates a much
complicated function that is essentially based upon the effort put forth by the employees that
is exposed to risk, loss and aversion in regards to uncertainty while the positive agency theory
suggests a linear relationship between motivation and pay (Pepper & Gore, 2015).
Conclusion
The behavioral agency theory comprises of four sectors that aims to explain the
particulars of the theory in a detailed way (Pepper & Gore, 2015). The first sector explains
the particular way in which the link between the performances by a particular employee with

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ACCOUNTING THEORY AND CONTEMPORARY ISSUES
the motivation provided has been explained. Secondly, the relationship between
compensation and agent motivation has been explained. The third sector constitutes of the
explanation of the factors like the inclusion of time discounting in this particular theory.
Lastly, the differences between the intrinsic and the extrinsic motivation and the
identification of the potential tradeoff between the two have been aimed to justify by the
behavioral agency theory. This particular journal article has provided an improved
understanding in regards to the sources or basis of foundation and further developments of
the agency theory especially the part where it is applicable to the compensation to the
executives.

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ACCOUNTING THEORY AND CONTEMPORARY ISSUES
References
Bosse, D. A., & Phillips, R. A. (2016). Agency theory and bounded self-interest. Academy of
Management Review, 41(2), 276-297.
Cui, V., Ding, S., Liu, M., & Wu, Z. (2017). Revisiting the Effect of Family Involvement on
Corporate Social Responsibility: A Behavioral Agency Perspective. Journal of
Business Ethics, 1-19.
Madison, K., Holt, D. T., Kellermanns, F. W., & Ranft, A. L. (2016). Viewing family firm
behavior and governance through the lens of agency and stewardship theories. Family
Business Review, 29(1), 65-93.
Montano, D. E., & Kasprzyk, D. (2015). Theory of reasoned action, theory of planned
behavior, and the integrated behavioral model. Health behavior: Theory, research and
practice, 95-124.
Pepper, A., & Gore, J. (2015). Behavioral agency theory: New foundations for theorizing
about executive compensation. Journal of management, 41(4), 1045-1068.
Shogren, K. A., Wehmeyer, M. L., Palmer, S. B., Forber-Pratt, A. J., Little, T. J., & Lopez, S.
(2015). Causal agency theory: Reconceptualizing a functional model of self-
determination. Education and Training in Autism and Developmental Disabilities,
251-263.