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AGENCY THEORY
An agency relationship may be defined as a contract under which one or more people (the principals) hire another person (the agent) to perform some services on their behalf, and hand over some choice making authority to that agent. In the financial management framework, agency connection exists among:
(a) Shareholders and Managers(b) Debt holders and Shareholders
Illustration Let us assume that Vishal Mehta & Co., (from Illustration 1) is using the following discounting rates in place of one rate:
Solutions to this Conflict In common, to make sure that managers act to the best interest of shareholders, the firm will: (a) Acquire Agency Costs in the form of:
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