Grading Rubric: Transaction Cost Theory in Corporate Governance (Research Paper Sample)

Transaction Cost Theory in Corporate Governance
Name of Student
Institutional Affiliation
Transaction Cost Theory in Corporate Governance
Research Introduction
Chapter Introduction
This chapter lays the background to the whole study. Essentially, a brief background of the transaction cost theory in corporate governance has been outlined then the research problem derived from the background. The chapter also discusses the fundamental purpose for carrying out the research based on the analysis of the current trend of the transaction cost theory in corporate governance. It also explains the significance of the research, which essentially indicates why the research is helpful to both the society and other scholars in the field of business. In other words, this section of the chapter discusses the important implication that the society and business scholars will accrue from the research. The chapter also contains properly outlined research questions that guide the research to focus on specific investigations. Finally, the chapter indicates a proper conceptualization of the topic of study, which in essence represents a deep background analysis of the topic.
Statement of the Problem
Corporate governance is a complex activity aimed at achieving multi-dimensional objectives. Many parties, including: owners, managers, leaders, suppliers, workers, communities and regulators are involved in this activity; making it so complex. Undoubtedly, corporate governance is part of the political economy, where changing markets and the power balance determines the route taken by an evolving firm, (Chen, 2007). In this regard, it would be very challenging to understand the relationship between corporate governance and the economic performance of an organization. However, financial economics, based on the transaction cost theory, have made a series of claims over corporate governance. The transaction cost theory proposes that an institution should try to minimize the cost of exchanging resources with the environment as well as the bureaucratic costs of exchanges with the company, (Galbraith, 2014). The theory has been helpful to organizations in weighing the costs involved in exchanging resources with the external environment, against bureaucratic costs of performing activities in the organization. This has proven to help firms in efficient spending on corporate governance.
Despite the important roles played by the transaction cost theory in helping to bring institutional spending into equilibrium, there exist conflicting ideas which suggest that the theory introduces more problems than solutions in the equilibrium thinking of a firm. Specifically, conflicting ideas in corporate governance suggests that the theory has a lot of limitations. There also exist ideas that suggest that the theory is too complex for managers to understand and apply in the corporate governance. These ideas have created a major problem, making firms' owners reluctant to adopting the theory in shaping their corporate governance. The great question is, are the firm owners basing their judgement on mere speculations which may not be true? This research seeks to look deeper into this problem in order to capture the real picture of the situation.
Purpose of the Research
As it has been discussed earlier, many contentious issues hover around the transaction cost theory. Specifically, there have been a lot of disagreement when trying to integrate the transaction cost theory with the corporate governance. Some people argue on its defenses while others argue against it. Over time, since the theory was first formulated, many combative ideas have evolved, which have been challenging and questioning the effectiveness of the management strategy. In this regard, there have been concerns for research that investigates the nature and effectiveness of the theory. Surprisingly, only a few studies have been conducted to investigate this topic. Even more surprising, just a few researchers have studied the nature and the effectiveness of the theory while looking at how it affects corporate governance. This indicates deficiency of research in this topic.
The purpose of this research is to investigate the nature, effectiveness and the limitations of the transaction cost theory in corporate governance, while focusing on the contentious issues that have been raised around this topic over time. In essence, this is an explanatory research aimed at explaining whatever lies behind the theory and its relation to corporate governance. By conducting the research, the researcher wants to acquire a deep understanding of the theory by deeply analyzing how it works, its assumptions and the factors that affect it. The researcher also aims at analyzing the theory’s effectiveness and limitations when it is applied in corporate governance. Finally, the researcher aims at coming up with some recommendation about the effective use of the theory in making improvements in the corporate governance.
Significance of the Research
Theories have been very important in solving problems and directing many different activities in the human life. Essentially, almost all activities that human beings carry out every day are guided by certain theories. In this regard, it is vital for human beings to deeply understand these theories in order for them to have the capability of utilizing the ideas behind the latter efficiently; thus enabling the former to execute their duties perfectly. Understanding a certain theory require one to know how it works, its effectiveness over other theories and its limitations.
This research creates an awareness of the transaction cost theory while focusing on how it is applied in corporate governance. By doing this, the research acts as a guide to the stakeholders of corporate governance. Specifically, studying the theory helps these stakeholders to understand how well they can utilize it in improving corporate governance. The research also helps the stakeholders to understand why they should follow the theory rather than follow other existing theories. It also makes the stakeholders aware of the limitations behind following the theory, thus preparing them for and helping them to avoid shortfalls in corporate governance.
The research is also adds materials to the already existing literature material in the field of business. This allows business scholars to have a wide range of materials from where to base their arguments. Of greater importance, adding to the existing literature materials gives other researchers a basis for their research. This in turn helps to improve research which is a great source of new knowledge (Loraine et al., 2010).
Research Questions
1 What is the nature of the transaction cost theory in corporate governance?
2 What is the effectiveness of using the transaction cost theory in corporate governance?
3 What are the limitations of using the transaction cost theory in corporate governance?
4 How well can managers utilize the transaction cost theory in order to better corporate governance?
Conceptualization
Transaction cost theory
The transaction cost theory is based on the concept of transaction costs. Transaction costs refer to the costs incurred in making economic exchanges. Some of these costs include: search and information costs, policing and enforcement costs, bargaining costs and many more. Looking at one of these examples, the policing and enforcement costs are the costs incurred when the firm is trying to make sure that the other parties sticks to the terms of the contract and in taking appropriate measures if it turns out that the parties fail to conform to the requirements of the contract.
Transactional cost theorists believe in the existence of two types of transaction costs, including the internal bureaucratic costs and the external transaction costs. According to the theories, when the internal bureaucratic costs are lower than the external costs, the firm grows as it is able to do its activities more cheaply, than if the activities were performed in the market, CITATION Wha14 \l 1033 (Galbraith, 2014). However, if in any case the bureaucratic costs get higher than the external transaction costs, the firm is downsized. According to Galbraith (2014), a company will grow if it is capable of performing its in-house activities cheaply, then by, for example outsourcing the activities from external providers in the market.
According to Frauendorf (2013) transaction costs will occur any time that new sets of technological capabilities or human skills are required to complete a transaction. In essence, the new capabilities and skills have to be purchased, thus incurring the firm some costs. Due to some factors, such as: bounded rationality, risks, core company assets, opportunism, environmental uncertainties among others, exchange of resources with the environment can incur costs to a firm, CITATION Fra13 \l 1033 (Frauendorf, 2013). This increases the external transaction costs, making it expensive for a company to control these factors. In such a case it may be economical for a firm to carry out the transaction activities within the firm so as to avoid costs related to things like supervision, contracts, meetings and such. The theory thus stipulates that if a company finds that external uncertainties are high, it is better for it to avoid outsourcing or exchanging resources with the environment.
Corporate governance
Corporate governance refers to the mechanisms, processes and relations by which organizations are directed and controlled. It includes the processes through which the objectives of a firm are formulated, and engaged in the context of social regulatory and market environment. According to Tricker (2012), corporate governance pertains the interaction among the board of directors, the managers, controlling shareholders, minority shareholders, regul...