class: intro to finance
Agency relationship refers to a consensual relationship between two parties, where one person (the principal) or entity authorizes the other, the agent, to act on his, her, or its behalf.
Agency relationships exist in most large corporations due to the separation of management from ownership.
The lack of alignment of the principal and the agent interests create an agency cost. What are the main implications of this separation?
What are the ways to mitigate the agency cost and align the interest of the management and shareholders?