Definition of Agency Theory
Agency theory is a broader term that gives an idea about the relationship between one-two parties i.e. agent (management, suppliers, etc.) and principal (company owners, shareholders). Agents are people who are working for the principal by using their financial resources and the power they have invested in them. Agents are paid for the services they offer to the principals.
This theory assumes that the interests and goals of principals and agents are not always aligned with each other. Conflict arises when agents’ decisions are more inclined towards their own goals and benefits rather than principal. This state of conflict is also known as the principal-agent problem.