Asked by: Rosauro Sancernibusiness and finance real estate industry
What is the agency theory in finance?
Last Updated: 11th January, 2020
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In respect to this, what is the meaning of agency theory?
Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.
Furthermore, what is an agency relationship in finance? An agency relationship is a fiduciary relationship. This means the agent is obligated to act in the best interests of the principal because the agent's actions will create legal obligations for the principal.
Considering this, what is agency cost theory?
An agency cost is a type of internal company expense which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions and disruptions, such as conflicts of interest between shareholders and management.
What is positive agency theory?
Positive agency theory proposes that principals can mitigate agency costs by establishing appropriate incentive contracts and by incurring monitoring costs.