it may choose to signal investors as to the content of this information. To do so effectively, however, management must not be perceived by investors to simply be attempting to better their own positions (Mitnick, 1993).
There are a number of ways in which management may signal investors without destroying their credibility. Management may hold off on exercising stock options, as an example. By acting in this manner, management may be seen to be signaling their belief that higher future earnings will cause the value of their stock options to be greater in the future than they are today (Shaffer, 1995). There are a number of other credible signals which management may communicate to the market, including the maintaining or raising of dividend levels. The market acts on the information communicated to it by firm management through the application of valuation theory.
Agency theory also works in instances of branch and subsidiary operations located at a distance from corporate headquarters (Staw, 1991). In simplest form, an agency problem arises when a local manager in a decentralized organization effects an action at the local level: (1) which is in the interests of the local unit of the organization or of the local unit manager; and (2) which is within the framework of delegated authority within the organization; but (3) which may not be in the best long-term interests of the organization. A simplistic example of such an agency problem would be the local unit manager who creates an ostentatious office lifestyle for himself or herself, which, although significant costs to the organization may be involved, does not preclude the posting of unit/profit center growth. Were home office management exercising direct control over such expenditures, they likely would not be allowed. Were home office management aware of such expenditures, they would likely be discouraged. In either instance, such costs would not be viewed as being ...