Question

8. How does agency theory (Chapters 2 and 4) differ from the equity theories dis- cussed in this chapter? 9. Does the entity theory or the proprietary theory provide a better description of the relationship existing between the large modern corporation and its owners? 10. Why has the entity theory fragmented into two separate conceptions?

Answer 1

Explanation:

Equity theory: also known as Adams equity theory, it focuses on establishing balance between employees input and result in an organisation.
Where the employees are able to establish relationship between the input and output their productivity increases and coordination with management.

Agency theory: it is based on principle that helps to understand and resolve issues between organisation and their agents.
To establish better relationship with agents, the organisation has to pay them based on their performance.

A.
The difference between equity theory and agency theory are

1. The scope of agency theory is much larger than equity theory.
2. The agency theory takes into consideration not only the owners but also the employees wheras equity theory is only concerned about the owners.
3. Equity theory is passive in nature and cannot be tested or extended, as compared to agency theory.
4. Agency theory is based on belief of testing and experimenting but equity theory is based on implementation concept.

  
B.
Yes, the entity theory helps the organisation to provide better description between large modern corporation and its owners as the entity theory is based on the theoretical concept, that the business are separated from owners of the entity. The owners are not considered personally liable for all the liability incurd by the organisation.

C.
The entity theory is fragmented into two concepts which can be proved further by instances like.

• The shareholders fund is divided into two capital account and retained earnings account.
• The Equity dividend paid to the owner as income is deducted from retained earning which shows that equity shareholders are the owner of the entity but have less claim on retained earnings.