Signaling Theory Based on the economic dictionary, the signal theory explains that the market responds with signals either good or bad, as the signal is seen as a guide to potential. Signal theory is a one-party idea (agent) with the credibility of giving some information about itself to another (principal). Signaling Theory was developed by Micheal Spence on 1973. For example, Michael Spence (potential worker) sends a signal of their ability to employer with an education that entitles him to the employer to receive them. The value of trust information comes from the fact that employers believe the qualification is positively correlated to having greater capability and difficulty in obtaining low labor capabilities.
Therefore, qualifications allow employers to distinguish low-potential employees with high potential employees. Personal habits are a sign that conveys information about an actor to himself. Betting that the team will win or lose can send a cue to the cobbler about someone’s identity (eg, Working as a sign that he is not a team fan).Signal theory is useful for describing behavior when two parties (individuals or organizations) have access to different information. Usually one, the sender must choose either and how to communicate (or signal) the information, and the recipient must know how to interpret the received signal. Hence, signal theory holds an important position in diversifying management literature including strategic management, entrepreneurship, and human resource management. However, the use of signal theory gains momentum in troubling in recent years, its central principle has been blurred as it is used to express the concern of the organization. Therefore, the authors examined their use in management literature, and a guide for future research that encouraged scholars to use figurative theory in new ways and develop more complex variants.
Agency Cost TheoryBased on the finance dictionary, the agency cost theory is the cost that arises from the inefficiency of the relationship between the agent and the principal. In the trading company, generally the agency costs may arise as executive companies (agents) can act in their own interests in a way that is detrimental to shareholders (heads). For example, they can raise their own salaries to an unrealistic level. Agency costs are reduced by providing appropriate incentives to align the interests of both agents and principals. Jensen and Meckling have suggested agency theory in 1976 that firms cost agency costs associated with external equity holders and with debt in the Capital Structure in their agency cost theory.Agency costs are the type of internal costs arising out of, or must be paid to agents acting on behalf of the principal. These costs arise because of core problems, such as conflicts between shareholders and management.
Shareholders want management to operate the company in a way that increases shareholder value, while management may want to expand the company in a way that maximizes their personal power and wealth which may not be for the best shareholder interest.Agency theory shows that the firm can be seen as contractual relationship (loosely defined) between resource holders. Agency relations arise when one or more individuals, principals, hire one or more other individuals, are called agents, to perform some of the services and then delegate the authorities to decide on the agent. The relationship of key agencies in the business is between shareholders and managers and between payers and shareholders. This relationship is not necessarily harmonious. Indeed, agency theory concerns the so-called agency conflicts, or conflicts of interest between agents and principals. This has implications for corporate governance and business ethics. Where the agency takes place, it also causes agency costs, which are the expenses incurred to maintain effective agency relationships (eg offering management performance bonuses that act to encourage managers to act in the interests of shareholders).
Thus, agency theory has emerged as the dominant model in financial economy literature, and is widely discussed in business ethicsWhich one is better ? The static trading theory and pecking order theory are two financial principles that help companies choose their capital structure. Both play the same role in the decision-making process and depend on the type of capital structure the company wishes to achieve. However, empirically the pecking order theory is the most widely used theory in determining the company’s capital structure.Static trading theory is a monetary theory based on the work of Modigliani and Miller economists. With static trade theory, and since the payment of corporate debt are tax deductible and there is less risk involved in taking on debt to equity, debt financing is initially cheaper than equity financing. This means companies can reduce the weighted average cost of capital (WACC) through a capital structure with a debt on equity.
However, increasing the amount of debt also increases the risk to the company, somewhat offsets the WACC decline. Thus, static trading theory identifies a mix of debt and equity where the WACC decline offsets the increased financial risk to the company.The pecking order theory states that companies must choose their own financial means internally through retained earnings. If this source of income is not available, the company must self-finance through debt.
As a last resort, a company needs to self-finance through a new equity issue. This pecking order is important as it signals to the public how the company is performing. If a company finances itself internally, it means that the company is strong. If the company’s financing is through debt, it is a sign that the management believes the company can meet its monthly obligations. If the company is self-financed by the issue of new shares, it is usually a negative signal, as the company believes its shares are valuable and it is intended to make money before the stock price falls. In a nutshell, order theory governing capital structure is one of the most influential theories in corporate leverage.