Definition for : Agency theory

Agency theory says that a company is not a single, unified entity. Agency theory calls into question the claim that all of the stakeholders in the company (Shareholders, managers, and creditors) have a single goal – Value creation. Agency theory shows how, on the contrary, their interests may differ and some decisions (related to borrowing for example) or how products (Stock options) come out of attempts to achieve convergence between the interests of managers and Shareholders to protect creditors. Agency theory analyses the consequences of certain financial decisions in terms of Risk, Profitability and, more generally, the interests of the various parties. Agency theory is the intellectual basis of Corporate governance. See also Agency costs.
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