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Hello, my understanding of transaction cost theory is as follows.
Directors, who represent the company, enter into transactions which will involve costs such as purchasing supplies.
There is a risk that directors, who have a fiduciary duty to shareholders, may not make the best purchasing decision.The risk of not making the best decision is divided into two : Bounded Rationality and Opportunism.
Bounded Rationality is where the directors did not make the best purchasing decision due to him not fully understanding the situation of the transaction, such as not making a proper analysis of the best suppliers and make decisions based on his own instinct.
Opportunism is where the directors did not make the best purchasing decision due to him fulfilling his own self-interest, such as purchasing low quality materials with low prices. He may want to achieve cost reduction targets which will earn him bonuses.
I hope the above will help you understand better regarding this theory. All the best for your exam.
I completely agree with Frank, did my F6 exam in June 13, really really thought i’m gonna get over 70 but managed to get 60-ish. examining style is getting easier but actually trickier.