This thesis employs the lenses of principal-agency theory and stewardship theory to examine the case of Lehman Brothers. It is based on a comprehensive examination of the theoretical foundations of principal-agency theory and stewardship theory, as well as an in-depth analysis of the business practices of Lehman Brothers.
One of the key findings of this thesis is that the self-interest postulated by the Principal Agency Theory is arguably too short-sighted. However, given that the firm failed to fulfil the principles of the Stewardship Theory, it can also be argued that this theory is similarly untenable. The application of principal-agency theory to the firm's actors demonstrates the complex nature of the crisis and the extent to which almost every actor was involved in its ultimate outcome. A multiplicity of actors, including the board, management, employees, auditors, and state actors, were involved, rendering it inappropriate to ascribe culpability to any single entity.
The primary causes of the demise of Lehman Brothers can be attributed to a combination of greed and deficiencies in corporate governance structures, compounded by an unfavourable macroeconomic environment. A confluence of macroeconomic factors, an organisational culture of excessive risk-taking and an inadequately constituted board of directors, all linked by a CEO who had been rewarded for excessive risk-taking in the past, resulted in the collapse of Lehman Brothers.
Table of Contents
- 1. Introduction
- 1.1 Methodology
- 2. Theoretic background
- 2.1 Principal Agent Theory
- 2.2 Stewardship Theory
- 2.2.1 Drivers in Stewardship Theory
- 3. Macro-Economic Factors of the Crisis
- 3.1 Neoliberal Economic Policies
- 3.2 Housing Bubbles
- 3.3 Securitization of Debt and Subprime
- 4. Lehman Brothers' Business in a Nutshell
- 4.1 Historic Lehman
- 4.2 Common Day Lehman
- 4.3 Lehman's Corporate Structure
- 4.4 Lehman Brothers and the Real Estate Market
- 4.5 Overleverage
- 4.6 Repo 105
- 4.7 Failed Takeover
- 4.8 Governance of Lehman Brothers and the Agency Framework
- 4.9 Debt Governance at Lehman Brothers
- 5. Application of the Principal Agency Theory and Stewardship Theory
- 5.1 Principal Agency Theory at Lehman Brothers: Different Stakeholders
- 5.1.1 Equity: Shareholders (Principals)
- 5.1.2 Board
- 5.1.3 Management and Employees (Agents)
- 5.1.4 Auditors, Ernst&Young (Agents)
- 5.1.5 State Entities (Fed)
- 5.2 Application of Principal - Agency Theory
- 5.2.1 Risk Taking and Moral Hazard
- 5.2.2 Information Asymmetry
- 5.2.3 Other Practices
- 6. Stewardship Theory in Lehman Brothers
- 6.1 Withdrawal of Confidence
- 6.2 Organizational Culture
Objectives and Key Themes
This thesis analyzes the Lehman Brothers collapse through the lenses of principal-agent and stewardship theories. It aims to understand the interplay of these theoretical frameworks within the firm's actions and the broader macroeconomic environment. The study seeks to determine whether the crisis stemmed from self-interested actors or unfavorable market conditions. It also investigates the adequacy of Lehman Brothers' governance mechanisms and proposes potential future improvements. * Principal-Agent Theory Application * Stewardship Theory Application * Macroeconomic Factors Contributing to the Crisis * Corporate Governance Failures at Lehman Brothers * Analysis of Lehman Brother's Business PracticesChapter Summaries
1. Introduction: This chapter introduces the Lehman Brothers case as a case study, examining it through the lens of principal-agent and stewardship theories. It highlights the intra-firm perspective and the role of macroeconomic factors, such as low interest rates, increased debt, and complex financial instruments, in the context of the 2008 financial crisis. The chapter emphasizes the unique situation of Lehman Brothers compared to other bailed-out institutions and outlines the application of the two theoretical frameworks to analyze both the shortcomings and strengths of the firm. The central question is whether Lehman Brothers' actors exploited the firm and, if so, by what means. Stewardship theory is presented as a counter-argument suggesting that unfortunate market circumstances played a significant role. 2. Theoretic background: This section lays the groundwork by defining and explaining the core tenets of principal-agent theory and stewardship theory. It explores the key concepts within each framework, setting the stage for their application to the Lehman Brothers case in later chapters. The differences and potential overlaps between these two theories are highlighted, providing a framework for a comparative analysis of the firm's actions. 3. Macro-Economic Factors of the Crisis: This chapter details the broader macroeconomic environment contributing to the financial crisis, examining elements such as neoliberal economic policies, the emergence of housing bubbles, and the widespread securitization of debt and subprime mortgages. The analysis emphasizes how these external factors created a fertile ground for the crisis, exacerbating the internal issues within Lehman Brothers. The significance of these factors in relation to the firm's internal decisions and actions is explored. 4. Lehman Brothers' Business in a Nutshell: This chapter offers a comprehensive overview of Lehman Brothers, tracing its history, examining its corporate structure, its involvement in the real estate market, its use of leverage, its Repo 105 strategy, and the ultimately failed attempts to secure a takeover. The section provides the necessary context for understanding the firm's inner workings and its vulnerability to the financial crisis. This chapter lays out the groundwork for applying the theoretical frameworks in subsequent chapters. 5. Application of the Principal Agency Theory and Stewardship Theory: This chapter applies the principal-agent and stewardship theories to analyze the various stakeholders within Lehman Brothers. It discusses the roles of shareholders, the board, management, employees, auditors (Ernst & Young), and state entities (the Federal Reserve). This analysis delves into issues such as risk-taking, moral hazard, and information asymmetry, assessing the extent to which self-interest and other factors contributed to the firm's downfall. 6. Stewardship Theory in Lehman Brothers: This chapter specifically focuses on examining Lehman Brothers through the lens of stewardship theory. It explores elements such as the withdrawal of confidence and the organizational culture within the firm, evaluating how these elements either supported or contradicted the principles of stewardship. This chapter provides a counterpoint to the principal-agent analysis in the previous chapter, offering a more nuanced understanding of the events that led to the firm's collapse.Keywords
Lehman Brothers, Principal-Agent Theory, Stewardship Theory, Financial Crisis of 2008, Corporate Governance, Risk Management, Macroeconomic Factors, Information Asymmetry, Moral Hazard, Overleverage, Securitization, Housing Bubble, Repo 105.
Frequently asked questions about the Lehman Brothers Language Preview
What is the Lehman Brothers Language Preview about?
The Language Preview provides a comprehensive overview of a study analyzing the collapse of Lehman Brothers. It includes a table of contents, objectives, key themes, chapter summaries, and keywords related to the study.
What theories are used to analyze the Lehman Brothers collapse?
The study uses Principal-Agent Theory and Stewardship Theory to analyze the collapse of Lehman Brothers. It aims to understand the interplay of these theories within the firm's actions and the broader macroeconomic environment.
What are the key themes of the study?
The key themes are: Application of Principal-Agent Theory, Application of Stewardship Theory, Macroeconomic Factors Contributing to the Crisis, Corporate Governance Failures at Lehman Brothers, and Analysis of Lehman Brother's Business Practices.
What macroeconomic factors are considered in the study?
The study considers neoliberal economic policies, housing bubbles, and the securitization of debt and subprime mortgages as significant macroeconomic factors contributing to the crisis.
What is covered in the "Lehman Brothers' Business in a Nutshell" chapter?
This chapter provides an overview of Lehman Brothers' history, corporate structure, involvement in the real estate market, use of leverage, Repo 105 strategy, and failed takeover attempts.
How is the Principal Agency Theory applied in the study?
The Principal Agency Theory is applied to analyze the roles of various stakeholders within Lehman Brothers, including shareholders, the board, management, employees, auditors (Ernst & Young), and state entities (the Federal Reserve). It examines issues such as risk-taking, moral hazard, and information asymmetry.
How is the Stewardship Theory applied in the study?
The Stewardship Theory is used to examine elements such as the withdrawal of confidence and the organizational culture within Lehman Brothers, evaluating how these elements either supported or contradicted the principles of stewardship.
What are some of the keywords associated with the study?
Keywords include: Lehman Brothers, Principal-Agent Theory, Stewardship Theory, Financial Crisis of 2008, Corporate Governance, Risk Management, Macroeconomic Factors, Information Asymmetry, Moral Hazard, Overleverage, Securitization, Housing Bubble, Repo 105.
What is the main question the introduction poses?
The central question is whether Lehman Brothers' actors exploited the firm and, if so, by what means. Stewardship theory is presented as a counter-argument suggesting that unfortunate market circumstances played a significant role.
What does the 'Theoretic background' chapter discuss?
This section defines and explains the core tenets of principal-agent theory and stewardship theory. It explores the key concepts within each framework, setting the stage for their application to the Lehman Brothers case in later chapters.
- Quote paper
- Samuel Tokmak (Author), 2024, What Can Be Learned from the Lehman Brothers Case Through the Lens of Principal Agent and Stewardship Theory?, Munich, GRIN Verlag, https://www.grin.com/document/1603062
