1.| What is agency theory?
Agency theory is an economic concept that explains the relationship between principals and agents in business transactions. It attempts to explain how principals (e.g. shareholders, owners, etc.) can ensure that their agents (e.g. managers, executives, etc.) act in their best interests.
2.| What are the main components of agency theory?
The main components of agency theory are the principal-agent relationship, the principal’s objective, the agent’s objectives, the agent’s incentives, and the monitoring of the agent by the principal.
3.| What are the three types of agency costs?
The three types of agency costs are agency costs of monitoring, agency costs of incentives, and agency costs of residual loss.
4.| What is the agency problem?
The agency problem is the conflict of interest that can arise when agents (e.g. managers, executives, etc.) act in their own interests rather than in the interests of the principal (e.g. shareholders, owners, etc.).
5.| What are the two main types of agency theory?
The two main types of agency theory are the agency costs theory and the principal-agent theory.
6.| What are the four factors that influence the effectiveness of agency theory?
The four factors that influence the effectiveness of agency theory are the objectives of the principal, the incentives of the agent, the monitoring of the agent, and the ability to resolve conflicts between the two parties.
7.| What is the difference between agency theory and stakeholder theory?
The difference between agency theory and stakeholder theory is that agency theory focuses on the relationship between principals and agents, while stakeholder theory focuses on the relationship between an organization and its stakeholders.
8.| What are the implications of agency theory for corporate governance?
The implications of agency theory for corporate governance are that it emphasizes the importance of effective monitoring and incentives to ensure that agents act in the best interests of the principal.
9.| How is agency theory used in financial reporting?
Agency theory is used in financial reporting to ensure that financial reports are accurate and reliable so that principals can make informed decisions.
10.| What are the advantages and disadvantages of agency theory?
The advantages of agency theory are that it provides a framework for understanding the relationship between principals and agents, and it emphasizes the importance of incentives and monitoring. The disadvantage of agency theory is that it may lead to a conflict of interest between principals and agents if not managed properly.