Abstract
Abstract This chapter reviews agency theory and its application to management accounting issues. I begin by explaining how agency models are formulated to capture incentive problems caused by moral hazard and adverse selection problems, and discuss the reasons why agency theory models are difficult to solve. I then review agency theory results regarding the properties that make performance measures valuable in a contracting setting and the optimal shape of contracts. I also review the literature on communication, including models where the revelation principle does not apply, so that nontruthful reporting and earnings management can take place. I then discuss multiperiod agency models, which are critical for comparing different accrual-accounting-based measures of performance in motivating investment behavior. The chapter ends by discussing common misconceptions regarding agency theory models and discussing areas for future research.
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