Introduction of Agency Theory
1.0 Introduction of Agency Theory
The specific definition of the theory based on the sources investorword.com and investopedia.com defined that the agency theory is a theory explaining the relationship between principals such as shareholders and agents. It is essentially involves the cost and way of resolving the conflicts between the principals and agents and change the something slightly to the correct position and decision related to the two group of conflict. Thus, the main objective of agency theory is to explain how contracting parties design contracts to minimize the costs associated with such problems. Thefreedictionary.com defined agency theory seeks to explain the relationship in order to recommend the appropriate incentives for both parties to behave the same way, or more specifically, for the agent to have the incentive to follow principal’s direction. Jensen and Meckling (1976) defined managers of the company as the ‘agents’ and the shareholders as the ‘principal’ based on their analysis. In other words, the shareholder, who is the owner or principal, delegates day to day decision making in the company directors, who are the shareholder’s ‘agents’.
The theory is face and attempt to deal with specific problem; first the goals of the principal and agent are not in conflicted. Second, that the principal and agent reconcile different tolerance of risk. In addition, the primary agency relationships in business are those (1) between stockholders and managers and (2) between debt holders and stockholders. Agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals.
The agency relationship can have a number of disadvantages relating to the opportunism or self interest of the agent: for example, the agent may not act in the best interests of the principal, or the agent may act only partially in the best interests of the principal. There can be a number of dimension to this including, for example, the
The specific definition of the theory based on the sources investorword.com and investopedia.com defined that the agency theory is a theory explaining the relationship between principals such as shareholders and agents. It is essentially involves the cost and way of resolving the conflicts between the principals and agents and change the something slightly to the correct position and decision related to the two group of conflict. Thus, the main objective of agency theory is to explain how contracting parties design contracts to minimize the costs associated with such problems. Thefreedictionary.com defined agency theory seeks to explain the relationship in order to recommend the appropriate incentives for both parties to behave the same way, or more specifically, for the agent to have the incentive to follow principal’s direction. Jensen and Meckling (1976) defined managers of the company as the ‘agents’ and the shareholders as the ‘principal’ based on their analysis. In other words, the shareholder, who is the owner or principal, delegates day to day decision making in the company directors, who are the shareholder’s ‘agents’.
The theory is face and attempt to deal with specific problem; first the goals of the principal and agent are not in conflicted. Second, that the principal and agent reconcile different tolerance of risk. In addition, the primary agency relationships in business are those (1) between stockholders and managers and (2) between debt holders and stockholders. Agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals.
The agency relationship can have a number of disadvantages relating to the opportunism or self interest of the agent: for example, the agent may not act in the best interests of the principal, or the agent may act only partially in the best interests of the principal. There can be a number of dimension to this including, for example, the