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On Applying AgencyTheory in Historical Accounting Research

Robert Bricker

Department ofAccountancy Case IVestern Reserve University


Nandini Chandat*

Department of Accounting Rutgers University

Accounting theory accounting and history havelargely evolved two as independent of study. fields Accounting research closely is allied withcontemporary models economics finance, in and whichemphasize rigorin logical construction statistical and analyses. Studies accounting in history, contrast, in applyeconomic theory veryinfrequently, are predominantly and descripfive.
There has been litfie communicationbetween accountantsand historians,

though tremendous a synergistic potential exists. importance combining The of historical and statistical approaches advancing in economic theoryand the complementary nature the two approaches longbeenemphasized of have by scholars asKeynes such [1890] Schumpeter and [1954]. Accounting concerned information is with flows thekorganization, and whicharecentral business to operations, managerial decision-making, the and nature efficiency capital and of markets. Hence, development accounting the of is embedded issues in relating the development the markets to of and corporation. Tools of historical scholarship therefore are uniquely suited to incorporating contextual factorsand path dependencies evaluating in accounting theory. Accounting theory has potential enrich understanding also the to our of business history. Lamoreaux, As Raff, and Temm [1997,p. 77] suggest, historians wouldbenefit fromtamingto economic theory "bothfor useful ideas for the lighta coherent and perspective on an otherwise sheds untidy past." Thisessay provides illustration potential an of synergies combining in historical theoretical and researchaccounting. focus theuse agency in We on of

* We aregrateful PaulMirantiandGaryPreyits many to for helpful conversations. The comments theparticipants the 1998Business of at History Conference alsoextremely were
beneficial. errors of course, own. Any are, our

BUS1NESS AND ECONOMICHISTORY,Volume Twenty-seven, Winter no. 2, 1998.


Copyright 1998 bytheBusiness History Conference. 0894-6825. ISSN
486

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models of capital marketsrelationships, which are the cornerstone of contemporan/accounting research. Current mainstream accounting research based extensively is on economic modelsof agency that represent operating the company(firm) manager "agent" the individual as and investor "principal." principalas This agent model also has been implicitly adopted theregulation accountancy, in of which focuses the needsand welfareof a diverse on groupof individual investors entrust who theirwealth thecontrol managers. to of In this paper, challenge traditional we this characterization capital of markets agency rehfionships an accounting in context. particular, focus In we on the role phyed by fund managers other managers capitalwho and of aggregate wealthof individuals makeinvestment the and decisions their on behalf. perform historical We an analysis thenature control influence of of and (de factoproperty rights)relationships theyexisted the turn of the cenas at tury,whenthe corporate economy stillin its infancy, compare was and these relationships thosethat haveevolved with among individual investors, fund managers, firmmanagers thepasttwodecades. and over These periods two in the evolution the American of corporate economy especially are interesting because signify erasin whichmoney they two managers, managers, fund and othermanagers capital of havephyedimportant roles capital in markets. Whileouranalysis intoaccount takes fundamental differences context in across two time periods study,someinteresting the we similarities also are apparent. findthat,likethemoney We managers bankers the turnof the and at century, fundmanagers otherprofessional and investment managers today of playa fundamental in transforming nature, part the structure, valuation and of property rights capital in markets. Theirrole,therefore, wellbeyond goes their traditional characterizationflow-through as entities financial or intermediaries. We suggest expanded an framework capital of markets agency rehfionships in whichinvestment managers represented agents individual are as of investors

andprincipals firmmanagers a richer of as basis framing conducting for and


accounting research, in policy and deliberations. Our approach thispaper beviewed answering in may as increasing calls for the adoption a theoretical of basisfor conducting historical research

[Ternin, 1991; Baskin Miranti, and 1997]. concur theviewof Douglas We with North [June 1994,p. 359]whenhe states: "Economic Histoo/is aboutthe performance economies of through time.The objective research thefield of in is not onlyto shed newlighton theeconomic but also contribute past, to to economic theov/byproviding analytical an framework will enable to that us understand economic change."
AgencyResearch Accounting in

Whiletheissue separation ownership thecontrol property of of from of had beencommented uponby AdamSmith[1976], Veblen[1923],and the PujoCommittee [1913], among others, chssic the workof BerleandMeans,

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TheModern Corporation Private and Property [1932]hashad a pivotal impacton accounting research regulation. and Combining legalandeconomic perspectives, BedeandMeans fortha provocative put thesis the separation the that of risk-bearing functions ownership the control of and function management of created conditions whichprofessional in managers couldtakeactions the to dement of the ownerandto theirown personal gain.One consequence of this, they argued, was the urgentneed for new and reliable channels of communication orderto protectshareholder in interests enabling by themto judge managerial performance theirroleasstewards corporate in of resources. The BedeandMeans' view,coming it did on the heels the Crash as of of 1929 foundfavorwith securities regulators looking answers. New for The York Stock Exchange(NYSE) was quick to implementseveralof their recommendations, in 1933,the NYSE in conjunction the American and with Institute Accountants of began promulgate to accounting standards comfor panies werelisted the NYSE. Thismayhavebeena case "toolitfie that on of too late"for the accounting profession, it did not stemthe public as pressure for governmental intervention.The Berle and Means thesisbecamethe 2 foundation the passage the Securities for of Acts of 1933 and 1934,which established responsibilitiesconnection the agency legal in with relationship between shareholders managers. important and One outcome these was of acts that accounting reports containing information aboutthe financial conditions andresults operations to be madeavailable managers companies of had by of interested accessing in public securities markets.
The Bede and Means [1932] work becamethe foundationfor subsequent capital markets agency models accounting. particular, in In Jensen and Meckling[1976] synthesized earlierworks by Bede and Meanswith the property rights contracting and literature developed Coase by [1937,1960], and AlchianandDemsetz [1972]. Theydeftned firm as a "legalfiction"that the maybe characterized a "nexus contracts." as of Their analysis focuses the on agency relationship between shareholders a fLrm(principals) managers of and (agents). principals The contract with the agent perform to someservices on the principal's behalf.Thesecontracts requirethe agentto exert effort and makedecisions. agent assumed maximize utility,whichis a The is to his functionof both pecuniary nonpecuniary and costsand benefits. the In process, manager incentives takevalue-reducing opportunistic the has to or actions suchasoverconsuming perks, shirking, stealing. or With competition and rational expectations capital in markets, suchbehavior the part of on managers reduces valueof the tom. This reduction tom valueis termed the in "agency cost."Contracts between shareholders managers writtenin and are
The 1983 Journal ofl_v and Economics symposium celebrating 50 anniversary the th of thepublication BedeandMeans of [1932] provides overview theenduring an of influence of
this work.

2 Historical studies the development accounting of of include Miranti [1989],and Previts Merino[1979]. and

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order reduce to agency andthereby, deadweight in firmvalue a cost, the loss as result theseparation ownership control. of of from Accountingconsideredplay important asanintegral of is to an role part thecontracts defme firm.For example, that a lending arrangements between a firm and its creditors often containseveral accounting basedcovenants. Accounting-based plans frequenfiycomponent executive bonus are a of compensation plans. Accounting measures commonly in theperformance are used evaluation a firm'scostand profit centers. of Wattsand Zimmerman argue [1986,p. 196]:"if accounting an important of the firm'scontracting is part process agency and costs (andhence, value firm and/ormanagers' compensation) varywith different contracts, accounting procedures the potential have to affectfirm valueand/or the manager's compensation." rationale This has given to several rise hypotheses regarding roleof accounting the information in market valuation firms managers' of accounting of and use discretion. Parallel to these theoretical developments, methodological innovations fmance in like the capital asset pricing models (CAPN madeit possible researchers 0 for to subject hypotheses the derived above statistical to empirical tests. The hypothesis accounting that reports demanded monitorthe are to relationship between managers shareholders termedthe stewardship and is concept has and been used accounting by historians explain existence to the of accounting Yamey, [e.g., 1962]. The principal-agent hasalsogenerated model otherhypotheses relating accounting to method choice, rationales accountfor ingregulation informativeness and of accounting reports. implications The of the manager-shareholder relationship contract agency for design havebeen studied using analytical models. literature Ross, This [e.g., 1973,1974; Wilson, 1968; Spence Zeckhauser, Mixrlees, and 1971; 1974,1976; Stiglitz, 1974,1975; Holmstrom, 1979;andAnfie,1982,1984]addresses principal's the problem thattheagent manager shirk nottakeactions willbe in thebest or will and that interests the principal. problem of The arises because principal the cannot observe agent's the actions. Therefore, optimal the contract between printhe cipalandthe agent provide the agent share the outcome his will for to in of actions. focus designing contracts to provide appropriate The on these is the incentives theagent optimal to and risk-sharing between principal the the and agent. This normative agency literature evolved has parallel the positive to agency literature derived fromtheworks Berle Means of and [1932] Jensen and andMeclding [1976]. These analytical models provide also intuition regarding theroleof accounting information principal-agent in relationships.order In to preserve mathematical the tractability theixanalysis, of thesemodelshave portrayed extremely simplistic situations have been basedon several and
unrealistic assumptions. 3

The contracting of accounting largely role has beenviewedin the context simple of agency models the shareholder-manager of relationship. Accounting researchers used have formal management compensation and plans
aBaiman [1982] provides goodoverview thisliterature. a of

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firmdebtcontracts generate testhypotheses managers' to and about choice of accounting procedures the stockpriceeffects thesechoices and of [e.g., Zmijewski and Hagennan 1981;Healy, 1985;DeAngelo, 1986, 1988;Jones
1991;Gaver,Gaver,andAustin,1995; Holthausen, Larcker, Sloan1995]. and The agency paradigm developments and relating the CAPM andthe to

efficientmarketshypothesis have also influencec accounting regulation. Accounting researchersthistradition in havesupported efforts accountthe of ing regulators analyzing implications theseeconomic by the of models for disclosure regulation. Financial The Accounting Standards Board(FASB), its predecessor, Accounting the Principles Board(APB),and the Securities and Exchange Commission (SEC) haveutilizedstudies suchas Beaver[1973], Beaver Demski and [1974], Benston [1969, 1973], asthebasis regulating etc. of thepractice accountancy. of The principal-agent literature thushad a tremendous has impacton accounting research and regulation. Yet, this research been narrowly has focused,and has been predominantly basedon analytical statistical or approaches employing standardized large databases. exclusive Such reliance on a narrow basis inappropriate advancing is in knowledge an interdisciplinary in subject accounting, like whichexists withina complex interplay political, of social economic and settings. Strikingly absent fromcontemporary accounting research a modeling even understandingthese is or an of contextual factors. Historical scholarship uniquely in suitedto bridging this void by providing necessary to understand the tools factors that havecontributed to economic change. fewstudies applied A have contemporary agency theory and related models information in economics historic to events periods. or Watts andZimmerman [1983] used principal-agent fromwhich argue a setting to that auditors' reputation served a bondforindependence in early as even merchant guilds. Long[1991] De investigated roleof the House Morgan the the of in earlycorporate economy America, in suggesting the need to resolve that principal-agent problems engendered the corporate by form of organization results thecreation institutions would exist a perfectly in of that not in competitive world.He argued thatJ.P. Morganserved interests individual the of investors did not behave a self-serving and in manner because theneedto of preserve vastamount reputafional the of capital stake. at Ramirez [1995] used contemporary financemethodology providean empiricalevaluation to supporting proposition J.P. Morganand Company the that resolved the principal-agent problemby alleviating informational asymmetries between investors managers. portrayed Morgan a financial and He J.P. as intermediary, who facilitated smoother a functioning the primary of agency relationship between individual shareholders managers. and Thesestudies primarily are concerned with applying contemporary agency related and economic models historical periods. issue to time The of howrelevant these models in thecontext particular periods busare of time in iness history however beenaddressed. thisessay, usehistorical has not In we research a manner is fundamentally in that different fromthestudies described

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above. Rather thanapply existing the stylized modeldirectly the past, to we provide dynamic a assessment the descriptive of validity the model.Our of analysis focuses the turnof thecentury, on whenthe corporate economy was still developing, on the pastquarter and century whichhaswitnessed the
tremendous rise of the institutional investor. We demonstrate the limitations of

characterizing a direct andsimple principal-agent rehtionship between individualshareholders firmmanagers capital and in markets aredominated that by thepresence these of institutional investors.
Capital Markets Relationshipsin the Early CorporateEconomy

An analysis theevolution agency of of relationshipscapital in markets is animportant perspective whichthedevelopment thecorporation from of and itsenvironment be addressed. may Agency theory providesparticularly a useful lens study past to the witha viewto understanding roleof accounting the informarion the development markets organizations. in of and Historical evidence thusobtained maybe utilized sharpen focus contemporary to the of models. The approach hasthe advantage economic also that models developed by contemporary researchers not applied a mechanistic are in manner study to the past, thus lessening dangers presentmindedness andBricker the of [Previts 1994]. America'sdrive to industrialism initiatedby the development of railroads the second of the eighteenth in half century gaveimpetus the to growthof the corporate form of organization [Chandler, Bruchey, and Galambos, 1968]. Until the 1880s,however, the typicalmanufacturing company small closely andlargely was and held served markets, local existing merely extended as versions sole of proprietorships orparmerships. Ownership andmanagement these in cases wereeithersubstantially same were the or closely related. External financial reporting therefore was considered unnecessary evenunwise. corporation the rightto privacy and A had regarding its financial information, just as any privatecitizendid. The regulation of accountancy during period, reflected state this as in corporation laws,also reflected sentiment this against public disclosure. These state lawsgenerally required sets reports: submitted public two of one to authorities, whichwere
considered be confidential, to and the other, summarized financial information

submitted stockholders, notto thepublic large to but at [Hawkins, 1963]. In the 1880s large industrial combines started emerge the United to in States. American The economy fastchanging a primarily was from undifferenfiated, agrarian, economy a differentiated, local into urban, industrialized It one. wasalsoexperiencing enormous growth. Whilein the 1850s, industrial the outputof the U.S. was far belowthat of England, 1894the valueof by American output almost equaled combined the output theUnited of Kingdom, France, Germany, byWorldWarI, America producing and and was morethan one-third theworld's of industrial goods [Chandler, Bruchey, Galambos, and 1968].Suchenormous growth madestructural changes inevitable, gave and impetus the development a corporate to of economy. integration The of

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ownership control and thatwasinherent the nineteenth in centuty ftrrnand evenearly closely-held corporations wayto theirseparation. develgave The opment railroads of further hastened gowth thecorporate the of economy by expanding possibilities commerce. the for Such enormous expansion within relatively span timerequired a short of thedeployment huge of amounts capital. of Capital markets, we knowthem as today, notexist. did Investment bankers thistimelikeJ.P.Morgan of played a central in filling need capital fuelthisexpansion Long,1991] role the for to [De dueto theirability mobili.e amounts capital. to large of The combinations merger and movement thelatenineteenth of centuty resulted the formation several in of publicly corporations. theabsence held In of adequate financial information public or disclosures these from corporations, investors bought theirsecurities primarily thebasis theirconfidence on of and trustin theinvestment firmsmarketing securities. investment the The bankers' involvement constitutedstamp quality an implicit a of and guarantee the of security Long,1991]. [De Corporate managers depended these also on investmentbankers raise to capital make market theindustrial and a for securities of
their firms.

There werethus fiers capital two of maxkets agency relationships during thisearlycorporate economy: between one individual investors investment and
bankers and the other between investment bankers and industrial firms. The

Berleand Meansworld of powerful, concentrated managers who directly controlled wealthof individual the investors not yet in place. was Individual investors effectively were investing thereputation theinvestment in of bankers, whotheybelieved information make had to good investment decisions. Financial reporting thiserawasrarely in thought necessary, prudent, or even demanded [Hawkins, 1963]. meager The financial statements didexist that werecompletely inadequate purposes individual for of investor valuation of securities. accounting The profession stillin its infancy. was Therewasno established of accounting body theory, thelackof uniformity accounting and in practices rendered financial statements inadequate a basis comparative as for evaluation firms.Auditing of practices were still considered unusual. The function public of accountants theirreports gossly and was misunderstood, and most accountants "neithercouldnor desired modifymanagement's to desire corporate for secrecy" [Hawkins, 1963, 145]. p. Financial relationshipscapital in markets weremade possible therefore by the structure property of rights. Investors duringthis periodexpected regular dividends fromthe corporations, aslongas theyreceived and these
dividends did not care about financial statements. The nature of control and

influence relationships existed thistimealsomade possible the that at it for organization financing corporations withtheabsence structured and of even of capital markets, adequate information flows, securities regulations a general and social acceptancethecorporate of organization. of form
Investment bankers were at the center of these control and influence

relationships, is well-documented business as in historyresearch. These

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bankers, particularly Morgan, J.P. were involved initially railroad with financing. They actedas managers largeunderwriting of syndicates whichagreed to purchase stocks, convertible bonds othersecurities purchased the and not by railroad corporation anoffering, sole in as underwriters, asdirect or subscribers of securities through private placements [Chandler Tedlow, and 1985]. These activities, centralimportance an economic of in systemwith relatively undeveloped capital markets, increased bankers' the controlover the raikoad industry. The system workedon faith, reputation, and character these of bankers, of which all wereessential factors theearly in development corporof ations.During the economic depression the 1890s,the industrywent of through series reorganizations, financed theinvestment a of again by bankers. These required raising cash of through issue newsecurities, the of realigning fixedcharges exchanging securities the old, and the creation by new for of voting trusts which were vestedwith full corporateauthorityby the shareholders. votingtrusts The werecontrolled investment by bankers who usedthemasvehicles wieldsignificant to control overtherailroads. trusts The served separate voting ownership to the and fights inherent common in stocks. The merger movement started that with the railroads spread other to industrial concerns thelatenineteenth in century, resulting a number large in of pubticly ownedmanufacturing companies. Somewell known companies of today,like General Electric, American Telephone Telegraphs, and Federal Steel, UnitedStates Steel, andInternational Harvester wereorganized the at turnof thecentury. needfor capital thefragmentation theindustry The and of (particularly thecase AT&T), resulted a close in of in relationship between the company and its bankers. The bankers fostered combinations industrial in concerns thepurpose bringing market with of the under control. example, For by 1900,Standard through series horizontal vertical Oil a of and combinations that wereorchestrated Morgan, by controlled 90% of the domestic industry [Galambos Pratt,1988].In the restructuring eleven and of majortomsof the
steelindustry into the United States SteelCorporation, first billion-dollar the

company, investment bankers again central. underwriting once were The circular issued thisconnection in notedthat "the entirePlanof Organization and ManagementtheUnited of States Corporation bedetermined J.P. Steel shall by Morgan and company" [Chandler Tedlow, and 1985,p. 282].J.P. Morgan orchestratedcreation financing U.S. the and of Steel, picked manager, hand the obtained 200%return funds a on advanced during merger, received the and
huge fees. The means financing for corporations concentrateda fewhands. were in

These bankers became important investment agents theturnof thecentury. at In early capital markets, existed there agency relationships between compara atively small number (fromtoday's perspective) large of corporations, a and relatively small group investment of managers industrial managers, and tom whoin turnhada fiduciary relationship theindividual with investors whose resources mobilis. The BedeandMeans they ed. thesis ignores vitalroleof the
these investment managers. analyzing corporation, In the BedeandMeans did

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not address roleof bankers unde-riters agents capitalism the and as of and therefore notadequately did portray property control relationships. Therewere,of course, several vociferous critics big business of and moneymanagers [e.g.,Brandeis, 1914].The ?ujo heatings the "money on trust"reported 1913thatthere "a highdegree financial in was of concentration ...anda close alliance between heads a fewN&vYorkcitybanks the the of and principal usersand suppliers capital"[Carroso, of 1973].De Long [1991, p. 217] asserts that "[t]he forty-fiveemployees Morganand Company of approved vetoed and proposed managers, top decided what securities they wouldundevrite, thusknplicidy and decided whatsecurities wouldbe issued andwhatlines business of should receive additional capital." Thecontrol overinvestor resources effected was through representation on corporate boards, controlling individual savings lifeinsurance in companies and banks, and by creating syndicate a system, whichconsisted various of techniques originating, of undenvfig,anddistributing securities. the new In 1920s, otherformsof institutional investment, particularly investment trusts, evolved. The absence regulation of separating commercial investment and banking we have as today, together a healthy economy with U.S. stimulated the rapidgrowth these of trusts.Small 4 investors invested these in trusts, whichin turninvested portfolios securities industrial in of of firms. market The values of thesecurities thetrusts of themselves typically greater thesumof were far than thevalues theproperty these of that trusts owned, consisting of common solely andpreferred stocks debentures, and mortgages, bonds, cash. isapparent and It thatin early capital markets pzemium paidfor financial a was entrepreneurship.

Theinvolvementinvestment of bankers theearly in corporate economy wentfarbeyond theircontemporary economic conceptualization as"financial intennediafion." andMeans not address pattern property Bede did this of control influence characterized capital and that early markets arguing the in that balance power shifted of had entirely favorof theprofessional in corporate manager. Theirfailure address to insfitufionalized of corporate forms control limitsthe descriptive validity their analysis the context the early of in of American corporate economy. There notexist direct did a agency relationship between individual investors corporate and managers. Investment bankers and trustmanagers agents individual as of investors provedto be knportant monitoring agents against opportunisfic behavior corporate by management [Carosso, 1973].Agencymodelsthat do not consider thesetwo tiers of relationships not accurately do portray capital markets relationships early in
American markets.

4 By 1927,Wall Street investment trusts sold$400millionof securities, by the fall and


of 1929,total assets thesetrustwereestimated exceed billion,an elevenfold of to $8 increase

[Galbraith, 1955].

AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 495

CapitalMarketsRelationships Contemporary in CapitalMarkets

It hasbeensuggested we are returning an era of financial that to capitalism [Hawley, 1995]. Investment companies play important today an role in themanagement of capital, individual as investors increasingly are employing professional managers. of 1992, capital As more than of thecommon half stock outstandingtheUnited in States, amounting over$2 trillion, owned to was by pension funds, mutual funds, compared 40%in 1980, less etc., with and than
15% in 1950) Institutions account about80% of all trading for activity. The average New York StockExchange transaction exceeds now 2,000 shares, which nearly times figure 1974, halfthedaily is six the for and trading volume takes place blocks 10,000 in of shares more. or Meanwhile, individual investors' direct holdings common of stock represent 16%of theirfinancial only assets,
down from 44% in the late 1960s,and transactions lessthan 100 shares of have

fallen to less than 2% of total volume.Bernstein [1992] suggests that "individuals buyandsell theirownaccount a disappearing who for are breed." To be sure,thereare fundamental differences between earlyand the moderncorporate economies. Following the stockmarketcrashof 1929, regulatory measures the Glass-Steagall restricted like Act investment activities of banks. The federal government through newlycreated the Securities and Exchange Commission (SEC)played directrole in requiring a fuller,more reliable moreusefid and disclosures the managers industrial by of finns.The SEC supported effortsof the American the Instituteof CertifiedPublic Accountants, accounting called and rules "generally accepted accounting principles" werepromulgated. thisperiod Since therehasbeena constant pressure on the part of finn managers improvethe qualityof their accounting to disclosures. measures The separating investment commercial and banking and enhanced regulation corporate of disclosures encouraged individual investor participation directly capitalmarkets. in For a few decades after the Great Crashof 1929,the emergence a retailmarketfor securities of rendered the Berle and Means model most closelyrepresentative capitalmarkets of relationshipstheyexisted. as During the prosperous periodfollowing World War II, however, a numberof nonbanking nondepository and institutions suchas insurance companies, pensionfunds,and mutualfundsbecame importantsecurities holders.As reported TheEconomist 6 in [1990],American privateinvestors reduced net value theirequity the of holdings about$550billionbetween by theendof 1983andtheendof 1989, which about is 40%of theirportfolios in 1983."Werethese trends continue, lastAmerican holdshares to the to directly wouldsellhislastonein theyear 2003"[The Economist, 1990].

Statistics institutional on holdings trading contained Bernstein and are in [1992]. The phrase "pension fundsocialism" beenemployed characterize extent has to the of institutionalized capital.

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The growingeconomicimportance contemporary of havestment managers increased property has theix control capabilities. large Many pension funds Calpets like havedefined structured and shareholder activism programs. 7 Thereareseveral highly publicized hastmaces of shareholder activism. 1990, In shareholders targeted ITF for excessive executive compensation. Pressures
from hastitutional shareholders resulted in the ouster of chief executives at several

companies suchas GeneralMotors,American Express, IBM, Westinghouse Electric, AppleComputer, Lilly,Kodak,Scott Eli Paper, Borden. and Pension fundsare also dixecfiy havolved corporate in governance throughboard representation, in regulatory In 1992, SEC,asa result pressure and areas. the of from institutional investors, adoptednew regulations virtuallyeliminating restrictions communication on amongshareholders a company. of Mutual funds have been prominently less involved corporate in governance.8 However, investment companies mutualfundshavea hugeamount economic like of power. 9 Capitalmarketstructures have also evolved a mannerfavoring in institutional investors. Trading now conducted is virtually roundthe clockin after-hours electronic trading accessible to institutional only investors. Large institutional investors now tradeblockshares the floor. Further,some can off

privately placed securities (under Rule 144A)maybe tradedonly among institutional investors privatetransactions. in Thesemeasures "furtherthe development a two-tier of stock market" [Torres, 1992]. In today's American economy, institutions enormous exert control over theproperty individual of investors actastheiragents making and in decisions regarding havesting operating in companies.By investing a mutualfund w ha rather thanin anoperating company, individual an investor property has and information rights against investment andnot against operating the fund the

conapmay. investment in turnhasthese The fund fights against operating the company. This fundamental of funds ignored role is whentheyare viewed withinthe traditional principal-agent framework represents that operating
company managers agents investors. as of

7See Wahal [1994] a descriptionsome thelarger for of of programs theprocess and of


activism.

sResearchers argued thishas have that been consequence a of U.S.Securities that laws aredesigned promote to market liquidity rather good than governance 03hide, 1993]. 9At theendofJune 1994, mutual funds controlled than trillion, more more $2 up than
100%in just3 years [Henriques, 1994]. 0Whileour analysis focuses the U.S economy, property on the control capabilities

exerted investment by managerstheU.S.isechoed many in in other countries Germany, like Japan, South and Africa. a discussioncapital For of markets relationships in these countries,
see Prouse [1995], Bartet al. [1995], Walter[1993]. and

AGENCY THEORY IN HISTORICAL ACCOUNTING


Conclusion

RESEARCH / 497

Our analysis suggests the simple that principal-agent modelthatis the basisfor muchof contemporary accounting research regulation not and is descriptive markets which of in there a high is proportion institutional of investors. two-tier A setting would that represent investment managers agents as of individual investors principals corporate and of managers wouldprovide a moreaccurate portrayal property of control agency relationships in these markets. While we recognizethat there are potentiallyseveral agency rehtionships among different capital market participants, consider the u we that elaboration we suggestdirectly that is useful accounting in theory, practice, and regulation. analysis Our suggestsneedfor broadening scope agency a the of research accounting. two-tier in The model moreclearly illmates contracting and finandal reporting issues involving investors, managers, corpfund and oratemanagers, wouldenable to raiseand consider and us theoretical issues that we havenot yet done.The agency modelalsoprovides someunique perspectives thedevelopment accounting on of thought, whichis grounded in theevolution capital of markets agency relationships. Researchers in accounting history accounting and theory have lot to say oneanother. a to
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