Agency Theory

An agency relationship arises whether one or more parties identified the principal contracts or hires another identified an agent to perform on his behalf some employed and then delegates decision creating authority to such hired party or Agent In the field of finance shareholders are the owners of the firm.  Although, they cannot arrange the firm as:

1. They may be moreover many to run a single firm.

2. They may expertise to run the firm and not have technical skills

3. They may not have time and are geographically dispersed.

Shareholders although employ managers who such will act on their behalf.  The managers are thus agents whereas shareholders are principal.