Question

Describe and explain Agency Theory and its main assumptions, and critically evaluate the role of this theory in corporate governance research.

Answer 1

Answer-

Agency Theory and its main assumptions and It's application in corporate governance research

Agency Theory explains how to best organize relationships in which one party determines the work while another party does the work.
In this relationship, the principal hires an agent to do the work, or to perform a task the principal is not willing to do.
In corporations, the principals are the shareholders of a company, delegating to the agent i.e. the management of the company, to perform tasks on their behalf.
Agency theory assumes both the principal and the agent are motivated by self-interest. This assumption of self-interest runs agency theory into conflicts.
If both parties are motivated by self-interest, agents are likely to pursue self-interested objectives that deviate with the goals of the principal, however agents are supposed to act in the sole interest of their principals.

The first is that the principal and the agent share common interests which means that both the principal and the agent desire the same outcome.
The second is that the principal is aware about the consequences of the agent’s activities.
The principal knows whether their agent’s actions serve in the principal’s best interest.
If either of the above statements is false, it follows that agency loss is therefore the likely outcome.