Busıness Fınance Iı Deneme Sınavı Sorusu #1013243
What is meant by agency theory?
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The agency theory is a supposition that explains the conflict between principals and agents in business. |
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Agency theory suggests that agency problems may arise if managers (agents) pursue different objectives other than those of the shareholders (principals). |
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Agency theory, then, examines the cost of interest that can arise between principals and agents. |
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The problem addressed in agency theory typically arises when stockholders hire managers to run their company. |
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The agent represents the principal in a particular business transaction and is expected to represent the best interests of the principal together self-interest. |
Agency theory suggests that agency problems may arise if managers (agents) pursue different objectives other than those of the shareholders (principals). Shareholders’ seek for wealth maximization which can be attained by the maximization of the value of the firm. However, managers often waste shareholders’ wealth by consuming perquisites or investing in pet projects. Hence, high debt levels can be a solution to prevent these agency problems, since higher borrowing costs discipline managers to funnel cash flows to interest payments.
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