Agency Theory (With Real World Examples) | From A Business Professor

Agency theory is a concept used to explain the important relationships between principals and their relative agents. Because the principal relies heavily on the agent to make the decision, there may be an assortment of conflicts or disagreements. For example, company executives, with an eye toward short-term profitability and elevated compensation, may desire to expand a business into new, high-risk markets. However, this could pose an unjustified risk to shareholders, who are most concerned with the long-term growth of earnings and share price appreciation. The Agency theory dives into such relationships. In this video, I will discuss what agency theory is, two major types of principle-agency Relationships, two real-world examples, and five strategies to help firms to reduce the chance of agency problems.