Question

What issue does agency theory examine?

Why is this important in a public corporation rather than in a private corporation?

Answer 1

a.

Agency Conflict is the conflict of interest arise between owner of company (Shareholders) and Agent (Manager). In company manager act as an agent and work for the owner that is shareholder and maximize the worth of shareholder. Sometime manager ignores shareholder interest and tries to maximize their own benefit. in this case conflict of interest between manager and shareholder arise which is called agency problem.

b.

agency theory examine more important in public corporation because in public corporation there is large number of shareholders and shareholder and management interact very rarely (once or twice) in a year. in private comapny their are limited number of shareholder they interact with management regularly.

So, because of less interaction shareholder and management in public corporation, the chance of creating agency problem is high. So, agency theory examine is more important in a public corporation rather than in a private corporation.