agency theory in acc

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On Applying AgencyTheory in HistoricalAccounting Research

Robert BrickerDepartmentfAccountancyCaseVesterneserveniversity

Nandini Chandat*DepartmentfAccounting

RutgersniversityAccountingheory ndaccountingistory ave argely volved stwoindependentields f study. ccountingesearchs closelylliedwithcontem-porarymodelsn economicsnd finance,whichemphasizeigor n logicalconstructionndstatisticalnalyses.tudiesn accountingistory,n contrast,applyeconomicheory ery nfrequently,ndare predominantlyescripfive.There has been litfie communication between accountantsand historians,though tremendousynergisticotentialxists. he mportancef combininghistorical nd statisticalpproachesn advancingconomicheoryand thecomplementaryatureof the two approachesave ongbeenemphasizedyscholarsuch sKeynes1890] ndSchumpeter1954].Accountings concernedith nformationlows nd hekorganization,whicharecentralo businessperations,anagerialecision-making,nd henature ndefficiencyf capitalmarkets. ence,hedevelopmentf accountingis embeddedn issues elating o the developmentf the markets ndcorporation.ools of historical cholarshipre therefore niquely uited oincorporating ontextual actors and path dependenciesn evaluatingaccountingheory.Accountingheory lsohas hepotentialo enrich urunderstandingfbusiness istory.As Lamoreaux, aff, and Temm [1997,p. 77] suggest,historiansouldbenefit rom taming o economicheory both or usefulideas nd for the lighta coherenterspectiveheds n an otherwisentidypast."Thisessay rovidesn illustrationf potential ynergiesn combininghistoricalnd heoreticalesearchn accounting.e focus n heuse f agency

* We aregratefulo PaulMirantiandGaryPreyitsor manyhelpful onversations.hecommentsf theparticipantst the 1998BusinessistoryConferenceerealsoextremelybeneficial. ny errors re,of course, ur own.BUS1NESS ND ECONOMICHISTORY,Volumewenty-seven,o.2,Winter998.Copyright1998 by heBusinessistory onference.SSN0894-6825.

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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 487models of capital markets relationships, hich are the cornerstone fcontemporan/accountingesearch.Current mainstream ccountingesearchs based extensively neconomicmodelsof agency hat represent he operating ompany firm)managers"agent" nd he ndividualnvestor s"principal."hisprincipal-agentmodelhasalsobeen mplicitlydoptedn theregulationf accountancy,which focuses n the needsand welfareof a diverse roupof individualinvestors hoentrustheirwealth o thecontrol f managers.In this paper,we challengehis traditional haracterizationf capitalmarkets gencyehfionshipsn an accountingontext.n particular, e focuson the role phyed by fund managers nd other managers f capitalwhoaggregatehe wealthof individuals nd make nvestment ecisions n theirbehalf.We perform nhistoricalnalysisf thenature f control nd nfluence(de factoproperty ights) elationshipss theyexisted t the turn of the cen-tury,when he corporateconomy asstill n its infancy, ndcompareheserelationshipsith those hat haveevolved mong ndividualnvestors,undmanagers,nd irm managersver hepast wo decades.hese woperiodsnthe evolution f the American orporate conomy re especiallynterestingbecauseheysignifywo eras n whichmoneymanagers,undmanagers,ndothermanagersf capital avephyed mportantoles n capitalmarkets.

Whileouranalysisakesntoaccountundamentalifferencesn contextacross he two time periodswe study,some nteresting imilaritiesre alsoapparent.We findthat, ike themoneymanagersndbankers t the turnof thecentury,undmanagersndotherprofessionalnvestment anagersf todayplaya fundamentalart n transforminghenature, tructure,ndvaluation fpropertyightsn capitalmarkets.heir ole, herefore,oeswellbeyondheirtraditionalharacterizations low-throughntities r financialntermediaries.We suggestn expandedrameworkf capitalmarkets gencyehfionshipsnwhich nvestment anagersre representeds agents f individualnvestorsandprincipalsf firmmanagerssa richer asisor framing ndconductingaccountingesearch,nd n policydeliberations.Our approachn thispapermaybeviewed sansweringncreasingallsfor the adoptionof a theoretical asis or conducting istorical esearch[Ternin, 991;Baskin ndMiranti, 997].We concur ith heviewof DouglasNorth [June 994,p. 359]whenhe states:Economic istoo/is about heperformancef economieshroughime.The objectivef researchn the fieldis not only o shednew ighton the economicast,but also o contributeoeconomicheov/byproviding n analyticalrameworkhatwill enable s tounderstandconomichange."AgencyResearchn Accounting

While he ssue f separationf ownershiprom hecontrol f propertyhad beencommentedpon by Adam Smith 1976],Veblen[1923],and thePujoCommittee1913], mong thers,he chssicworkof BerleandMeans,


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488 / ROBERT BRICKER AND NANDINI CHANDARTheModern orporationndPrivate roperty1932]hashad a pivotal mpactonaccountingesearchndregulation.Combiningegaland economic erspec-tives,BedeandMeansput forth a provocativehesishatthe separationf therisk-bearingunctionsf ownershipnd he control unction f managementcreated onditionsn whichprofessionalanagersould akeactionso thedement of the ownerand to their own personal ain.One consequencefthis, they argued,was the urgentneed for new and reliablechannels fcommunicationn order o protectshareholdernterests y enablinghemtojudgemanagerialerformancen their oleasstewardsf corporateesources.The BedeandMeans' iew,coming s t did on the heelsof the Crashof 1929 found avorwith securitiesegulatorsooking or answers.he NewYork Stock Exchange NYSE) was quick to implementseveralof theirrecommendations,nd n 1933, he NYSE in conjunction ith the AmericanInstitute f Accountantsegano promulgateccountingtandardsor com-panieshatwere istedon the NYSE. Thismayhavebeena case f "too itfietoo late" or the accountingrofession,s t did not stem he publicpressurefor governmentalntervention.The Berle and Means thesisbecame hefoundation or the passage f the Securities cts of 1933 and 1934,whichestablishedegal esponsibilitiesn connection ith the agencyelationshipbetween hareholdersndmanagers. ne mportant utcome f these ctswasthat accountingeports ontainingnformation bout he financial onditionsandresults f operationsad to be madeavailable y managersf companiesinterestedn accessingublic ecurities arkets.The Bede and Means [1932] work became he foundation or sub-sequent apitalmarkets gencymodelsn accounting.n particular,ensen ndMeckling [1976] synthesizedarlierworks by Bede and Means with thepropertyights ndcontractingiterature evelopedy Coase1937,1960], ndAlchianand Demsetz 1972].They deftned he firm as a "legal iction" hatmaybe characterizeds a "nexus f contracts."heir analysisocuses n theagencyelationshipetween hareholdersf a fLrm principals)nd managers(agents).he principalsontract ith the agent o performsomeservicesnthe principal's ehalf.Thesecontracts equire he agent o exert effort andmakedecisions.he agent s assumedo maximize is utility,which s afunctionof both pecuniary nd nonpecuniaryostsand benefits.n theprocess,he manager as ncentiveso takevalue-reducingr opportunisticactions uchas overconsumingerks, hirking, r stealing. ith competitionand rationalexpectationsn capitalmarkets, uchbehavior n the part ofmanagerseduceshe valueof the tom. This reductionn tom value s termed"agency ost."Contracts etween hareholdersnd managersre written n

The 1983Journalfl_v andEconomicsymposiumelebratinghe 50 hanniversaryfthepublicationf BedeandMeans 1932] rovidesnoverview f theenduringnfluencefthis work.2 Historical tudies f the developmentf accountingncludeMiranti [1989],andPrevits ndMerino 1979].


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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 489order o reduce gencyost, nd hereby,hedeadweightossn firmvalue saresult f theseparationf ownershipromcontrol.Accountingsconsideredo play n mportantoleasan ntegralartofthe contractshatdefme firm.For example,ending rrangementsetweenfirm and its creditors ften containseveral ccountingasedcovenants.Accounting-basedonus lans re requenfiycomponentf executiveom-pensationlans. ccounting easuresrecommonlysedn theperformanceevaluation f a firm'scostand profit centers.Wattsand Zimmerman rgue[1986,p. 196]:"if accountings an important art of the firm'scontractingprocessndagencyostsandhence,irmvalue nd/ormanagers'ompen-sation) arywith different ontracts,ccountingroceduresave he potentialto affect irm valueand/or the manager'sompensation."his rationale asgiven ise o severalypothesesegardinghe oleof accountingnformationnmarket aluationf firmsandmanagers'seof accountingiscretion.arallelto these heoreticalevelopments,ethodologicalnnovationsn fmanceikethe capital sset ricingmodels CAPN made t possibleor researchersosubjecthe hypotheseserived bove o statisticalmpiricalests.The hypothesishat accountingeports re demandedo monitor herelationship etweenmanagers nd shareholderss termed he stewardshipconceptndhasbeenused y accountingistorianso explainheexistencefaccountinge.g.,Yamey, 962].The principal-agentodelhasalsogeneratedotherhypotheseselatingo accounting ethod hoice,ationalesor account-ingregulationnd nformativenessf accountingeports. he implicationsfthe manager-shareholdergency elationshipor contractdesign avebeenstudied sing nalytical odels.his iteraturee.g.,Ross, 973,1974;Wilson,1968;SpencendZeckhauser,971;Mixrlees,974,1976;Stiglitz, 974,1975;Holmstrom, 979;andAnfie, 1982,1984]addresseshe principal'sroblemthat heagent r manager ill shirk ndnottakeactionshatwill be n thebestinterests f the principal. he problem rises ecausehe principal annotobservehe agent's ctions. herefore,he optimal ontract etweenhe prin-cipalandthe agentwill provide or the agent o sharen the outcome f hisactions.he focus n designinghese ontractss to provideheappropriateincentiveso theagent ndoptimalisk-sharingetweenheprincipalnd heagent.This normative gencyiterature as evolvedparallel o the positiveagencyiterature erivedrom heworksof Berle ndMeans 1932] ndJensenandMeclding1976].Theseanalytical odels lsoprovidentuition egardingtheroleof accountingnformationn principal-agentelationships.n order opreservehe mathematicalractability f theixanalysis,hesemodelshaveportrayed xtremely implistic ituations nd have been basedon severalunrealisticssumptions.The contractingole of accountingas argely eenviewed n thecontextof simple gencymodelsof the shareholder-managerelationship.Accountingesearchersave sedormalmanagementompensationlans nd

aBaiman 1982]provides goodoverview f this iterature.


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490 / ROBERT BRICKER AND NANDINI CHANDARfirm debtcontractso generatend esthypothesesboutmanagers'hoice faccountingroceduresnd the stockprice effectsof thesechoices e.g.,Zmijewski nd Hagennan 981;Healy, 1985;DeAngelo, 986, 1988;Jones1991;Gaver,Gaver,andAustin,1995; Holthausen, arcker, ndSloan1995].The agency aradigmnddevelopmentselatingo the CAPM and heefficientmarketshypothesisave also influencecccountingegulation.Accountingesearchersn this radition avesupportedhe efforts f account-ing regulators y analyzinghe implicationsf theseeconomicmodels ordisclosureegulation.he Financial ccounting tandardsoard FASB), tspredecessor,he Accounting rinciples oard APB),and the SecuritiesndExchangeCommissionSEC) haveutilizedstudies uchas Beaver 1973],Beaver ndDemski 1974],Benston1969,1973], tc.as hebasis f regulatingthepractice f accountancy.The principal-agentiterature as thus had a tremendousmpactonaccountingesearch nd regulation. et, this research as been narrowlyfocused,and has been predominantlyasedon analytical r statisticalapproachesmployingargestandardizedatabases.uch xclusiveeliance na narrowbasiss inappropriaten advancingnowledgen an interdisciplinarysubjectike accounting,hichexistswithina complexnterplay f political,social ndeconomic ettings.trikinglybsentromcontemporaryccountingresearchs a modeling r even nunderstandingf these ontextualactors.Historicalscholarshipn uniquely uited o bridging his void byprovidinghe necessaryools o understandactors hat havecontributedoeconomichange. fewstudiesave pplied ontemporarygencyheory ndrelatedmodelsn informationconomicso historic vents r periods.WattsandZimmerman1983] sed principal-agentettingromwhich o arguehatauditors'eputationerved sa bond or ndependencevenn earlymerchantguilds. e Long[1991] nvestigatedhe role of the Houseof Morgann theearlycorporate conomyn America,suggestinghat the need to resolveprincipal-agentroblems ngenderedy the corporateorm of organizationresultsn thecreationf institutionshatwould otexistn a perfectlyompet-itive world.He argued hatJ.P. Morganservedhe interests f individualinvestorsnddid not behaven a self-servinganner ecausef the need opreservehevastamount f reputafionalapital t stake. amirez1995] sedcontemporaryinancemethodologyo provide an empiricalevaluationsupportinghe propositionhat J.P. Morganand Companyesolvedheprincipal-agentroblemby alleviatingnformationalsymmetriesetweeninvestorsndmanagers.e portrayed.P.Morgan sa financialntermediary,who facilitated smootherunctioningf the primary gencyelationshipbetweenndividualhareholdersndmanagers.Thesestudies re primarily oncerned ith applying ontemporaryagency nd related conomicmodels o historicalime periods. he issueofhowrelevanthesemodels re n thecontext f particularimeperiodsn bus-iness istory ashowever ot beenaddressed.n thisessay, e usehistoricalresearchn a mannerhat s fundamentallyifferentrom he studies escribed


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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 491above.Rather hanapply he existing tylizedmodeldirectlyo the past,weprovide dynamic ssessmentf the descriptivealidity f the model.Ouranalysisocuses n the turnof the century, hen he corporateconomy asstill developing,nd on the pastquarter enturywhichhaswitnessedhetremendous rise of the institutional investor. We demonstrate the limitations ofcharacterizingdirectand simple rincipal-agentehtionshipetweenndiv-idualshareholdersnd irmmanagersn capitalmarketshataredominatedythepresencef thesenstitutionalnvestors.Capital Markets Relationships n the Early CorporateEconomy

An analysisf theevolution f agencyelationshipsn capitalmarketssan mportant erspectiveromwhich hedevelopmentf the corporationnditsenvironmentaybe addressed.gencyheory rovidesparticularlysefullens o studyhepastwitha view o understandingheroleof accountingnfor-marion n the developmentf markets nd organizations.istorical videncethusobtainedmaybe utilized o sharpenhe focusof contemporaryodels.The approach lsohas the advantagehat economicmodels evelopedycontemporaryesearchersrenot appliedn a mechanisticannero studyhepast, hus esseninghedangersf presentmindednessPrevitsndBricker 994].America'sdrive to industrialismnitiatedby the development frailroadsn the second alf of the eighteenthentury ave mpetuso thegrowthof the corporate orm of organizationChandler, ruchey, ndGalambos, 968]. Until the 1880s,however, he typicalmanufacturingcompany assmall ndcloselyeldand argely ervedocalmarkets,xistingmerely sextendedersionsf sole roprietorshipsr parmerships.wnershipand managementn these aseswereeithersubstantiallyhe sameor werecloselyelated. xternal inancialeporting as herefore onsiderednnec-essary ndevenunwise. corporationad he right o privacyegardingts

financial nformation,ust as any private citizendid. The regulation faccountancyuring hisperiod, s reflectedn statecorporationaws,alsoreflectedhissentimentgainst ublicdisclosure.hesestate awsgenerallyrequiredwo sets f reports: nesubmittedo public uthorities,hichwereconsideredo be confidential, nd the other, summarizedinancial nformationsubmittedo stockholders,utnot o thepublic t arge Hawkins,963].In the 1880sargendustrialombinestartedo emergen the UnitedStates. heAmericanconomy as astchangingroma primarily ndifferen-fiated, grarian,ocal conomyntoa differentiated,rban,ndustrializedne. twasalsoexperiencingnormousrowth.While n the 1850s, he industrialoutputof the U.S. was far below hat of England, y 1894 the valueofAmerican utput lmost qualedhecombinedutput f theUnitedKingdom,France, ndGermany,ndbyWorldWar , America asproducing ore hanone-third f theworld'sndustrialoodsChandler,ruchey,ndGalambos,1968].Suchenormous rowthmadestructuralhangesnevitable,nd gaveimpetuso the developmentf a corporateconomy. he integrationf


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492 / ROBERT BRICKER AND NANDINI CHANDARownershipndcontrol hatwas nherentn the nineteenthentutytrrnandevenearlyclosely-heldorporationsaveway o theirseparation.he devel-opment f railroadsurther astenedhegowth f thecorporateconomyyexpandinghepossibilitiesorcommerce.Such normousxpansionithin relativelyhort pan f time equiredthedeploymentf huge mountsf capital. apitalmarkets,swe know hemtoday, idnot exist.nvestmentankers f this ime ikeJ.P.Morgan layedcentralole n filling heneed or capitalo fuel hisexpansionDeLong,1991]due o theirability o mobili.earge mounts f capital.The combinationsndmergermovement f the atenineteenthentutyresultedn the formation f several ublicly eldcorporations.n the absenceof adequateinancialnformationr public isclosuresrom hese orporations,investorsoughtheirsecuritiesrimarily n thebasis f theirconfidencendtrust n the nvestmentirmsmarketinghesecurities.he investmentankers'involvementonstituted stamp f quality nd an implicitguaranteef thesecurityDe Long,1991].Corporate anagerslsodependedn thesenvest-mentbankerso raise apital ndmake marketor the ndustrialecuritiesftheir firms.

Therewere hus wofiersof capitalmaxketsgencyelationshipsuringthisearlycorporate conomy: nebetweenndividualnvestorsnd nvestmentbankers and the other between investment bankers and industrial firms. TheBerle and Meansworld of powerful, oncentratedanagers ho directlycontrolledhe wealthof individualnvestors asnot yet in place. ndividualinvestorsereeffectivelynvestingn the eputationf the nvestmentankers,who heybelieved ad nformationo makegood nvestmentecisions.Financialeportingn thiserawas arelyhought ecessary,rudent, revendemandedHawkins, 963]. he meagerinancialtatementshatdidexistwerecompletelynadequateor purposesf individualnvestor aluation fsecurities.he accountingrofession asstill n its infancy. herewas noestablishedodyof accountingheory, nd he ackof uniformityn accountingpracticesenderedinancial tatementsnadequates a basis or comparativeevaluation f firms.Auditingpractices ere still considerednusual. hefunction f publicaccountantsnd their eportswasgosslymisunderstood,and most accountantsneithercouldnor desired o modify management'sdesireor corporateecrecy"Hawkins,963,p. 145].Financialelationshipsn capitalmarkets eremadepossiblehereforeby the structure f property ights. nvestors uring his periodexpectedregular ividendsromthe corporations,ndas ongas they eceivedhesedividends did not care about financial statements. The nature of control andinfluenceelationshipshatexisted t this ime alsomade t possibleor theorganizationnd inancingf corporationsvenwith heabsencef structuredcapitalmarkets,dequatenformationlows, ecuritiesegulationsnda generalsocial cceptancef thecorporateormof organization.Investment bankers were at the center of these control and influencerelationships,s is well-documentedn business istory esearch. hese


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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 493bankers,articularly.P.Morgan, ere nvolvednitially ith ailroadinancing.They actedas managersf largeunderwritingyndicateshichagreedopurchasetocks, onvertibleonds ndothersecuritiesot purchasedy therailroad orporationn anoffering, ssoleunderwriters,r asdirect ubscribersof securitieshrough rivate lacementsChandlerndTedlow,1985].Theseactivities, f central mportancen an economicsystemwith relativelyundevelopedapitalmarkets,ncreasedhe bankers' ontrolover the raikoadindustry. he systemworkedon faith, reputation, nd character f thesebankers,llof whichwereessentialactorsn theearly evelopmentf corpor-ations.During the economicdepression f the 1890s, he industrywentthrough series f reorganizations,gain inanced y the nvestmentankers.These equiredaising f cash hroughhe ssue f newsecurities,ealigningfixedcharges y exchangingew securitiesor the old, and the creation fvoting trusts which were vestedwith full corporateauthorityby theshareholders.he voting rustswerecontrolledy investmentankers housed hemasvehicleso wieldsignificantontrolover he railroads. he trustsservedo separatehevoting ndownershipightsnherentn common tocks.The mergermovementhat startedwith the railroads preado otherindustrialoncernsn the atenineteenthentury,esultingn a number f largepubticlyownedmanufacturingompanies. omewell known companies ftoday, ike GeneralElectric,American elephone nd Telegraphs,ederalSteel,UnitedStates teel, nd nternationalarvester ereorganizedt theturnof thecentury. he need or capital nd he fragmentationf the ndustry(particularlyn thecase f AT&T), resultedn a close elationshipetweenhecompany nd its bankers. he bankers ostered ombinationsn industrialconcernsiththepurpose f bringinghemarket nder ontrol. or example,by 1900,Standard il through series f horizontal ndvertical ombinationsthat wereorchestratedy Morgan, ontrolled 0% of the domesticndustry[Galambos ndPratt,1988]. n the restructuringf elevenmajor oms of thesteel ndustry nto the United StatesSteelCorporation,he first billion-dollarcompany,nvestmentankersnce gain ere entral.heunderwritingircularissuedn this connectionoted hat "the entirePlanof OrganizationndManagementf theUnited tates teelCorporationhall e determinedyJ.P.Morgan nd company"ChandlerndTedlow, 985,p. 282].J.P. Morganorchestratedhecreationnd inancingf U.S.Steel, and ickedhemanager,obtained 200% eturnon funds dvanceduringhe merger, ndreceivedhuge ees.The meansor financingorporationsereconcentratedn a fewhands.These ankersecamemportantnvestmentgentst the urnof thecentury.In early apitalmarkets,here xistedgencyelationshipsetween compar-atively mallnumberfrom oday's erspective)f large orporations,ndarelativelymall roupof investmentanagersnd ndustrialom managers,who n turnhada fiduciaryelationshipith the ndividualnvestors hoseresourcesheymobilis.d.The BedeandMeanshesisgnoreshevital oleofthesenvestment anagers.n analyzinghecorporation,edeandMeansdid


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494 / ROBERT BRICKER AND NANDINI CHANDARnot addresshe role of bankers nd unde-riters s agents f capitalismndtherefore idnot adequatelyortray roperty ontrol elationships.

Therewere,of course, everal ociferousriticsof big businessndmoneymanagerse.g.,Brandeis, 914].The ?ujo heatings n the "moneytrust" eportedn 1913 hat herewas"a highdegree f financialoncentration...anda close llianceetweenheheads f a fewN&v Yorkcitybanks nd heprincipalusersand suppliers f capital" Carroso, 973].De Long [1991,p. 217] assertshat "[t]he forty-fiveemployees f Morganand Companyapproved nd vetoedproposedop managers,ecided hat securitiesheywouldundevrite, ndthusknplicidy ecided hatsecuritiesouldbe issuedandwhat inesof businesshouldeceive dditionalapital."Thecontrol ver nvestoresourcesaseffectedhroughepresentationon corporateoards,ontrollingndividualavingsn life nsuranceompaniesand banks, nd by creating syndicateystem, hichconsistedf varioustechniquesf originating,ndenvfig,anddistributingewsecurities.n the1920s,otherformsof institutionalnvestment,articularlynvestmentrusts,evolved. he absence f regulation eparatingommercialnd investmentbanking swe have oday,ogether itha healthy .S.economytimulatedherapidgrowthof these rusts.Smallnvestorsnvestedn theserusts,which nturn nvestedn portfolios f securitiesf industrialirms. hemarket alues f

thesecuritiesf the rustshemselvesere ypicallyargreaterhan hesumofthevalues f thepropertyhat heserusts wned, onsistingolely f commonandpreferredtocksnddebentures,ortgages,onds, ndcash.t is apparentthat n early apitalmarkets pzemium aspaid or financialntrepreneurship.The nvolvementf investmentankersn theearly orporateconomywent ar beyondheircontemporaryconomiconceptualizations"financialintennediafion."edeand Meansdid not addresshis patternof propertycontrol nd nfluencehatcharacterizedarly apitalmarketsn arguinghat hebalance f powerhadshifted ntirelyn favorof theprofessionalorporatemanager.heirfailureo addressnsfitufionalizedormsof corporateontrollimits he descriptivealidity f their analysisn the contextof the earlyAmericanorporateconomy.heredidnot exist direct gencyelationshipbetweenndividualnvestorsndcorporate anagers.nvestmentankersndtrustmanagerss agents f individualnvestors roved o be knportantmonitoringgents gainst pportunisficehavior y corporate anagement[Carosso, 973]. Agencymodels hat do not consider hese wo tiers ofrelationshipso not accuratelyortray apitalmarketselationshipsn earlyAmerican markets.

4 By 1927,Wall Streetnvestmentrusts old$400millionof securities,nd by the fallof 1929, total assets f these rustwere estimatedo exceed 8 billion,an elevenfoldncrease[Galbraith, 955].


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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 495CapitalMarketsRelationshipsn Contemporary apitalMarkets

It hasbeensuggestedhat we are returningo an era of financialcapitalismHawley,995].nvestmentompaniesoday lay n mportantolein themanagementf capital,s ndividualnvestorsre ncreasinglymployingprofessionalapitalmanagers.sof 1992,more hanhalfof thecommontockoutstandingn theUnitedStates,mountingo over$2 trillion,wasowned ypensionunds,mutualunds, tc.,comparedith40% n 1980,and ess han15% in 1950) Institutions ccountor about80% of all tradingactivity. heaverage ew York StockExchangeransactionow exceeds ,000 shares,whichs nearly ix imeshefigureor 1974, ndhalf hedaily rading olumetakes lacen blocks f 10,000 haresr more.Meanwhile,ndividualnvestors'directholdingsf common tock epresentnly16%of their inancialssets,down from 44% in the late 1960s,and transactionsf less han 100 shares avefallen to less than 2% of total volume.Bernstein 1992] suggestshat"individualshobuyandsell or theirownaccountrea disappearingreed."To be sure, hereare fundamentalifferencesetweenhe earlyandmoderncorporate conomies.ollowing he stockmarketcrashof 1929,regulatorymeasuresike the Glass-Steagallct restrictednvestment ctivitiesof banks.The federalgovernmenthrough he newlycreated ecuritiesndExchange ommissionSEC)played direct ole in requiringuller,morereliable ndmoreusefiddisclosuresy the managersf industrialinns.TheSEC supportedhe effortsof the American nstituteof CertifiedPublicAccountants,ndaccountingulescalled generallycceptedccountingrin-ciples"werepromulgated.ince hisperiod herehasbeena constant ressureon the part of finn managerso improve he qualityof their accountingdisclosures.he measureseparatingnvestmentndcommercialanking ndenhancedegulation f corporate isclosuresncouragedndividualnvestorparticipation irectly n capitalmarkets. or a few decades fter the GreatCrashof 1929, he emergencef a retailmarket or securitiesenderedheBerle and Means model most closely epresentativef capitalmarketsrelationshipss heyexisted.During the prosperouseriod ollowingWorld War II, however,numberof nonbankingnd nondepositorynstitutionsuchas insurancecompanies,ension unds,and mutual undsbecamemportantsecuritiesholders.As reportedn TheEconomist1990],American rivate nvestorsreducedhe net valueof theirequity oldingsy about$550billionbetweentheendof 1983and heendof 1989,whichs about 0%of theirportfoliosn1983. Were hese rendso continue,he astAmericano holdshares irectlywouldsellhis astone n theyear2003" The conomist,990].

Statisticsn nstitutionaloldingsnd rading recontainedn Bernstein1992].The phrase pensionundsocialism"asbeenemployedo characterizehe extentofinstitutionalizedapital.


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496 / ROBERT BRICKER AND NANDINI CHANDARThe growing economic mportanceof contemporary avestmentmanagersas ncreasedheix roperty ontrol apabilities.any argepension

fundsikeCalpets avedefined ndstructuredhareholderctivism rograms.Thereareseveral ighly ublicizedastmacesf shareholderctivism.n 1990,shareholdersargetedTF for excessivexecutive ompensation.ressuresfrom hastitutional shareholders resulted in the ouster of chief executives at severalcompanies uchas GeneralMotors,AmericanExpress,BM, WestinghouseElectric,AppleComputer, li Lilly,Kodak,ScottPaper, ndBorden. ensionfunds are also dixecfiy avolvedn corporate overnancehroughboardrepresentation,nd n regulatoryreas.n 1992, heSEC,asa result f pressurefrom institutionalnvestors, doptednew regulationsirtuallyeliminatingrestrictionsn communicationmongshareholdersf a company.Mutualfunds avebeen ess rominentlynvolvedn corporateovernance.8owever,investment ompaniesike mutual undshavea hugeamountof economicpower.Capitalmarket structures ave also evolved n a manner avoringinstitutionalnvestors.rading s now conductedirtually ound he clock nafter-hourslectronicrading ccessiblenly o institutionalnvestors.argeinstitutionalnvestors an now tradeblock shares ff the floor. Further,someprivately lacedsecuritiesunderRule 144A)may be tradedonly amonginstitutionalnvestorsn private ransactions.hesemeasuresfurther hedevelopmentf a two-tier tockmarket" Torres, 992].In today's merican conomy,nstitutionsxertenormousontrol vertheproperty f individualnvestorsndactas heiragentsn making ecisionsregarding avestingn operating ompanies.By investing a a mutual undrather han n an operatingompany,n ndividualnvestor asproperty ndinformationights gainsthe nvestmentundandnot againsthe operatingconapmay.he nvestmentund n turnhas heseights gainstheoperatingcompany. his fundamentalole of funds s ignoredwhen heyare viewedwithin the traditionalrincipal-agentrameworkhat representsperatingcompanymanagerssagents f investors.

7 SeeWahal 1994]ora descriptionf some f the arger rogramsnd heprocessfactivism.sResearchersave rguedhat hishasbeen consequencef U.S.Securitiesaws hataredesignedo promote arketiquidityatherhan ood overnance3hide,993].9At theendof June 994,mutualunds ontrolledore han 2 trillion, pmore han100% n just3 yearsHenriques,994].0 Whileour analysisocusesn the U.S economy,he property ontrol apabilitiesexertedy nvestmentanagersn theU.S. sechoedn many ther ountriesikeGermany,Japan, ndSouth frica. ora discussionf capitalmarketselationshipsn these ountries,seeProuse1995],Bartet al. [1995], ndWalter 1993].


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AGENCY THEORY IN HISTORICAL ACCOUNTING RESEARCH / 497Conclusion

Our analysisuggestshat the simple rincipal-agentodel hat s thebasis or much of contemporaryccountingesearch nd regulations notdescriptivef marketsn which heresa highproportionf institutionalnves-tors.A two-tier ettinghatwould epresentnvestment anagerssagents findividualnvestorsnd principalsf corporatemanagers ouldprovidemoreaccurateortrayalf propertyontrol gencyelationshipsn thesemarkets.While we recognize hat there are potentiallyseveral agencyrehtionshipsmong ifferent apitalmarket articipants,we considerhat heelaborationhatwe suggests directly sefuln accountingheory, ractice,ndregulation. ur analysisuggestsneed or broadeninghe scope f agencyresearchn accounting.he two-tiermodelmoreclearlyllmates contractingand finandal eportingssuesnvolvingnvestors,undmanagers,nd corp-oratemanagers,nd wouldenableus to raiseand considerheoreticalssuesthat we have not yet done.The agencymodelalsoprovides omeuniqueperspectivesn thedevelopmentf accountinghought, hich s groundedntheevolution f capitalmarketsgencyelationships.esearchersn accountinghistory ndaccountingheory ave lot to say o oneanother.ReferencesAlchian,A.A., andH. Demsetz, Production,nformation osts ndEconomicOrganiza-tion,"Americanconomiceview,2 (1972),777-795.Ante, R., "The Auditorasan Economic gent," ournalfAccountingesearch,0 (Autumn1982),Part I, 503-527., "Auditorndependence,"ournalofAccuntingesearch,2 (Spring 984), -20.Baiman, ., "Agency esearchn ManagerialccountmA Survey,"ournalfAccountingLiterature,1982),154-210.Bart,G., J. Getson, ndB. Kantor, ShareholderssAgents ndPrindpals:he Case or

SouthAfrica'sCorporateGovernanceystem,"ournalf AppedCo,orate inance,(Spring 995),18-31.Baskin,.B.,andP.J.Miranti, r.,A HistoryfCo,orateinanceNewYork,1997).Beaver,W.H., "WhatShould e theFASB'sObjectives?"ournalfAccountanff,36(August1973),49-56.--, andJ. Demski, The Natureof Financial ccounting bjectives: SummaryndSynthesis,"n StucesnFinandalAccuntingctives: 974, upplemento Vol. 12 of the]ournal fAccountingesearch,1974),170-187.Benston, .J., TheEffectivenessndEffects f theSEC's ccountingisclosureequire-ments,"n HenryG. Manne, d.,Ecnoraicoffand heRegulationfCo,orate ecurities(Washington,C, 1969),23-79.--, "RequiredDisclosure nd the StockMarket:An Evaluation f the SecuritiesExchange ct of 1934,"Americanconomicev/ev,3 (March 973), 32-155.Berle, .A.,andG.C.Means, heModernoorationnd rivatero)erlyNewYork,1932).Bernstein,.L.,Capitaldeas:hemprobableffginsfModernVallStreetNewYork,1992).Bhide, ., "TheHiddenCosts f StockMarket iquidity,"ournalfFinancialconomics,4n As discussedn McCraw 19841ndMiranti 1990].


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Galbraith,.K., TheGreat rash 929 Boston, 955).Gaver,J., K. Gaver, and J. Austin,"AdditionalEvidenceon BonusPlansand IncomeManagement,"ournalfAccountingndEconomics,9 (1988), -28.Hawley, .P.,"Political oice,Fiduciary ctivism,nd he nstitutionalwnershipf U.S.Corporations:he Role of Publicand Noncorporateension unds,"SodologicalPerspectives,8 (1995), 15-435.Hawkins, .F., "TheDevelopmentf ModemFinancial eportingracticesmong mer-icanManufacturingorporations,"usinessistory evievAutumn 963), 35-168.Healy,P.M.,"TheEffectof Bonus chemesn Accountingecisions,"ournalfAccountingandEconomics,(1985),85-107.Henriques, .B., "A TrustBetrayed: uestionsf ConflictStingMutualFunds," heNevYorkTimes, ugust , 1994.Henriques,.B., "A TrustBetrayed:o Some undManagers,edFlags on'tMeanNo,"TheNearYorkTimes,ugust , 1994.Hendques,. B., "A TrustBetrayed:eekingataon Funds,nvestorsndRegulatorsindFrustration,"heNevYorkTimes,ugust , 1994.Holmstrom,B., "Moral Hazard and Observability,"he BellJournal f EconomicsndManagementalerice,Spring 979), 4-91.Holthausen,.,D. Larcker,ndR. Sloan,Annual onus chemesnd heManipulationfEarnings,"ournalfAccountingndEconomics,9 (1995), 9-74.Jensen, .C.,andW. Meckling,Theory f theFirm:Managerialehavior,gency ostsandOwnershiptructure,"ournalofFinandalEconomics,(1976), 05-370.Jones,., "Earnings anagementuringmportReliefnvestigations,"onrnalfAcconntingResearch,9 (Autumn 991),193-228.Keynes,.N., TheScopendMethodfPoeticalconomyLondon, 890).Lamoreaux,., D.M.G. Raff,andP. Temin, NewEconomic pproacheso the Study fBusinessistory," nsinessndEconomicistory,6 (Fall1997), 7-79.McCraw, ., ProphetsfRegulationCambridge,A, 1984).Miranti,P.J.Jr.,Accountan.cyomesfAge:TheDevdopmeutfanAccountingrofission,886-1940


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