The Agency Theory For The Best Interest Of The Shareholders

1234 Words Nov 21st, 2015 5 Pages
The Agency Theory:
This theory attributes the control for the best interest of the shareholders,it was introduced by Demsetz and Alchian (1972 )and was further improved by Meckling and Jensen ( Heslinda and Benedict,2009). The agency is a contract between the principal which are shareholders and the agent which are the managers .

Most of the literature on corporate governance finds its roots in agency theory the relationships normally occurs when the principal hires the agent to perform a service on the principals ' behalf. the decision making authority is delegated by the principal to the agent.However the relationship between the principal and the agent can not be as simple and smooth as it appears (Theory of Mallin, 2010).

Several agency problems do occur in this relationship due to which the performance of the company is effected.The managers, due to the opportunism may act in their own interest and may not act in the best interests of the shareholders.To maximise their economic utility the managers may abuse the power given to them by the shareholders or even they can refuse to take any risks in order to meet shareholders objectives as at some points of decision making the managers have to be courageous to take risks in order to increase the wealth of shareholders. This is mainly due to the different risk approaches that managers and shareholders have, as the shareholders are less risk aware in order to maximise their revenues from the shares they are holding,…

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