Analysis of Information Asymmetry Literature review

Analysis of Information Asymmetry - Literature review Example Owners of the corporations called shareholders, therefore, remain separate from the active management of the organization and managers manage the organization as custodian of the shareholders. However, this creates an issue of agency wherein though managers act as the agents of shareholders, they pursue their own interests. (Sau,2003) The actions of managers, therefore, are assumed to be in direct conflict with the interests of the shareholders. One of the key reasons for this conflict of interest is the availability of and access to information. Since managers are actively involved in the management of any firm, therefore, they possess relatively superior information as compared to outsiders. This, however, can also create corporate failures as shareholders may not be fully aware of the actions of the managers. One way through which both financial and non-financial disclosures can be improved is the effective regulations to make things more transparent. ( Baek, Kim, & Kim, 2008) Inf ormation asymmetry As discussed above, information asymmetry arises when one party to the transaction has superior or more information as compared to other parties to the transaction.  Ã‚   In adverse selection models, it is assumed that one party lacks the understanding and information about a transaction whereas, in moral hazards model, the ignorant party lacks the information about the performance of a transaction. (Chen, Berger, & Li, 2006). Moral Hazards and Agency Problems Information asymmetry becomes important within organizational context due to the agent-principal relationship between the shareholders and managers of the firm. One of the key reasons as to why moral hazards can arise is based upon the notion that if all the actions of employees are not monitored, there are chances that moral hazards may arise. This peculiar situation, therefore, outlines that shareholders may inherently be in a disadvantageous position because of their inability to monitor the actions of managers in an effective and comprehensive manner. (Heath, and Norman, 2004)  Ã‚