Signalling, Agency Theory and Accounting Policy Choice

Abstract Signalling and agency theories appear in the accounting literature to be competing theories. This article demonstrates that they are actually consistent theories, in that one set of sufficient conditions of signalling theory is at least consistent with one set of sufficient conditions of agency theory. Indeed, a considerable overlap exists between the two theories: rational behaviour is common to both; information asymmetry in signalling theory is implied by positive monitoring costs in agency theory; ‘quality' in signalling theory can be defined in terms of agency theory variables; and signalling costs are implicit in some bonding devices of agency theory. Examples are given where both theories’ predictions about lobbying, accounting choices, and voluntary auditor selection are added together.

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