STUDIES IN SMALL ENTERPRISE FINANCIAL MANAGEMENT (Essay Sample)

STUDIES IN SMALL ENTERPRISE FINANCIAL MANAGEMENT By Name Course Instructor Institution Location Date Studies in Small Enterprise Financial Management Introduction Since business organizations comprise of different groups of stakeholders, it is vital for the management to consider the Agency theory in evaluating the relationships between the internal agents and the principals of the business. The approach is integral in suppressing poor performances that may result from the agents ill motives. Studies reveal the unpredictability of the agents' conducts through the application of the Agency theory. The argument is that the process of evaluating and ascertaining the agents' practices is expensive or difficult. In addition, the principal and the agent may presume to undertake different courses of actions whenever risks are present in the business environment. Therefore, the theory might fail to accrue relevant results to aid in asserting a lasting solution whenever such problems occur (Demiroglu & James 2010, p. 3701). The argumentative evaluation of the Agency theory in the following study seeks to indicate the different methods that authors depict as integral in suppressing the failures presented in the theory while trying to cordon the occurrence of risks. It is critical to understand the theory fails to deliver the desired resolutions to solve the principal-agent conflicts since it only enables one party to bear the vital information necessary to address the situation at hand. Studies indicate that the use of the Asymmetric Information in enhancing the Agency Theory's performance sets a basis to acquaint one party of an increased level of superiority over the other. Under such occasions, the theory fails to solve the conflicts since the party subjected to the situation engages the other to a conflict (Céspedes, González, & Molina 2010, p. 154). In 1961, Miller and Modigliani adapted a precise solution to averting the harmful effects that emanates from the prevalence of such risks in the business place. However, arguments assert that their solutions served to ascertain the process by which dividends would be remitted to the shareholders. Further, the methods served to the advantage of the shareholders in any company since they would henceforth be capable of predicting the capital base (Li & Zhu 2005, p. 1758). However, it has been realized that the method was inadequate in evaluating and ascertaining whether the executives' practices served to the interests of the shareholders and development of the company to achieve the set goals and objectives (Crabbe & Hewlege 1994, 74). Jonathan Thomas evaluated the problems that are common in the business environment and ascertained that income fluctuations are likely to cause conflicts and affect principal-agent relationships. The scholar criticized the application of Asymmetric Information as an approach to evaluating the theory (Bolton & Scharfstein 1990, p. 100). Through his study, it is known that the principals of the firm represent the risk ‘averse' borrowers while the agents or rather shareholders represent the risk neutral lenders. Hence, the application of the Asymmetric Information approach stirs conflicts between the parties at the extent that the shareholders are subjected to the principals' ill practices, and deem it necessary to address the situation before affecting the capital investments and profits. It is argued that the informative approach surveys the practices of one party over the other (Martimort & Moreira 2010, p. 159). On the other hand, Patrick Bolton and David Scharfstein evaluated the business environment between principals and shareholders to firms, and amassed different results. The scholars argued out that Asymmetric Information is crucial in maintaining a firm's capital base and investors in the event of poor performance (Holm & Schøler 2010, p. 49). The researchers assume that the informative approach engages investors into a process of funding the prospective firms rather than abandoning them whenever faced by financial constraints. Critics from different researches indicate that the application of the Asymmetric Information approach yields short-term solutions as the contented group may be discontented in a different future event. The Lithograving approaches define various methods through which investors of small financial enterprises may learn of their principals' performances and react accordingly in order to secure the value of their equity. The methods argue out that investors can only evaluate the principals' conduct after evaluating the presented reports concerning the retained earnings over the issued dividends. However, neo-economics presume that the application of Perfect Information approach is integral to the implementation of actual judgments concerning situations over the Asymmetric Information approach (Lemmon & Zender 2010, p. 2). Critically, the Agency Theory should present equated remedies to principals and agents in the event of conflicts, thus; the adoption of the Perfect Information approach as a mode of communication is capable of yielding accurate results over the Asymmetric approach. In the second account, the Lithograving approach argues out that the firms may retain owners' equity and dictate the extent at which the business may borrow from banks in order to restructure its capital base. Through such practices, the method enables the investors to realize that the firm seeks to prosper without incurring increased debts from the lending institutions (Armstrong, Guay, & Weber, 2010, p. 179). On the contrary, investors may adapt the method as fraudulent and targeted to benefit the company's executives. Under such circumstances, the agents will react and injure the company's set of plans and objectives in the short and long run periods. Further, the Lithograving approach indicates that firms are capable of retaining owners' equity from stocks and capital gains to use them for financial purposes. It is obvious that conflicts will result from the application of such methods since investors will have different views and plans to spend or reinvest their earnings (Eisenhardt 1989, p. 58). Therefore, the Asymmetric Information presents the hidden actions and hidden information problems that restrain the principal from establishing the course of action that the investors are likely to react in the presence of Lith...