equity theory

Examples of equity theory in the following topics:

• Equity Theory

  • Equity theory explains the relational satisfaction in terms of fair or unfair distribution of resources within interpersonal relationships.
  • Equity theory attempts to explain relational satisfaction in terms of perceptions of fair or unfair distributions of resources within interpersonal relationships.
  • Regarded as one of many theories of justice, equity theory was first developed in 1963 by John Stacey Adams.
  • Equity theory proposes that individuals who perceive themselves as either under-rewarded or over-rewarded will experience distress, and that this distress leads to efforts to restore equity within the relationship.
  • Equity theory focuses on determining whether the distribution of resources is fair to both relational partners.

• Assessing and Restoring Equity

  • Equity theory plays a role in analyzing organizational behavior.
  • Equity theory suggests that individuals who perceive themselves as either under-rewarded or over-rewarded will experience distress, and that this distress leads to efforts to restore equity within the relationship.
  • Equity theory proposes that rewards (outcomes) should be directly related to the quality and quantity of employees' contributions (inputs).
  • The core concept of equity theory amounts to each party's inputs and outcomes equating.
  • Distinguish the core components of equity theory that seek to measure equity accurately and restore equity when appropriate

• Equity Theory

  • Equity theory states that perceptions of equality in the input/outcome ratio of employees determines their relative job satisfaction.
  • Equity theory was first developed in 1963 by John Stacey Adams, a workplace and behavioral psychologist, who asserted that employees seek to maintain equity between the inputs that they bring to a job and the outcomes that they receive from it, against the perceived inputs and outcomes of others.
  • Thus, groups will evolve such systems of equity, and will attempt to induce members to accept and adhere to these systems.
  • According to equity theory, the person who gets "too much" and the person who gets "too little" both feel distressed.
  • Employees expect a fair return for what they contribute to their jobs, a concept referred to as the "equity norm."

• Perspectives on Motivation

  • Theories of motivation are of course rooted in psychology.
  • There are two main cognition-oriented theories: equity theory and expectancy theory.
  • Equity Theory is based on the basic concept of exchange.
  • Essentially, Expectation Theory and Equity Theory demonstrate the value of rewarding an employee's investment of time and effort with appropriate compensation.
  • Frederick Herzberg's Two-Factor Theory is the most well known of the job-oriented theories, despite the fact that it has not been supported by empirical evidence.

• Trade-Off Consideration

  • Trade-off considerations are important because they take into account the cost and benefits of raising capital through debt or equity.
  • The trade-off theory of capital structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits.
  • It is often set up as a competitor theory to the pecking order theory of capital structure.
  • An important purpose of the theory is to explain the fact that corporations are usually financed partly with debt and partly with equity.
  • Describe the balancing act between debt and equity for a company as described by the "trade-off" theory

• Pecking Order

  • Financing comes from internal funds, debt, and new equity.
  • Raising equity, in this sense, can be viewed as a last resort.
  • The pecking order theory was popularized by Stewart C.
  • As a result, investors will place a lower value to the new equity issuance.
  • This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required.

• Capital Structure Overview and Theory

  • Modigliani and Miller created a theory of Capital Structure in a perfect market.
  • Trade-off theory allows bankruptcy cost to exist.
  • Empirically, this theory may explain differences in Debt/Equity ratios between industries, but it doesn't explain differences within the same industry.
  • Pecking Order Theory tries to capture the costs of asymmetric information.
  • This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, while debt is preferred over equity if external financing is required.

• Cost of capital

  • Firms usually calculate a single cost of capital number, and, under economic theory, will only pursue projects with an expected return greater than the cost of capital.
  • In order to determine a company's cost of capital, the cost of debt and the cost of equity must be calculated.
  • The cost of equity is determined by comparing the investment to other comparable investments with similar risk profiles.
  • This determines the "market" cost of equity.
  • where D is the value of debt in the company, E is the value of equity, rd is the cost of debt, t is the tax rate, and re is the cost of equity.

• Equity Finance

  • Companies can use equity financing to raise money and/or increase shareholder liquidity (through an IPO).
  • Financing a company through the sale of stock in a company is known as equity financing.
  • Firms obtain capital from two kinds of sources: lenders and equity investors.
  • According to finance theory, as a firm's risk increases/decreases, its cost of capital increases/decreases.
  • This theory is linked to observation of human behavior and logic: capital providers expect reward for offering their funds to others.

• Optimal Capital Structure Considerations

  • In a simple example, if a company's assets come from a $20 million equity issuance and lending that amounts to $80 million, the capital structure can be said to be 20% equity and 80% debt.
  • However, as with many theories, it is difficult to use this abstract theory as a basis to evaluate conditions in the real world, where markets are imperfect and capital structure will indeed affect the value of the firm.
  • A company's securities typically include both debt and equity; therefore, one must calculate both the cost of debt and the cost of equity to determine a company's cost of capital.
  • At some point, however, the cost of issuing new debt will be greater than the cost of issuing new equity.
  • Captial structure is the assignment of the sources of company assets into equity or debt securities.