Agency Theory: A Review in Finance

Abstract

The problems of agency and risk sharing arise due to the separation of ownership and control of a large firm, when conflicts of interest exist between principals (owners) and agents (managers). The main source of these problems is asymmetric information, which implies an agency cost for the principal. Agency theory, which is still one of the fundamental theories in corporate finance, focuses on minimizing costs in agency relations. This study critically evaluates the principal-agent relations, focusing on the interaction between the shareholder-manager and bondholder-shareholder in corporate finance.