What are the assumptions, focus, and hypothesis of agency theory?
What are the assumptions, focus, and hypothesis of agency theory?
ASSUMPTION OF AGENCY THEORY:-
There are two key assumptions underlying the agency theory, and they are:
Individuals are generally egoists who act in their own self-interests. In short, both the principal and agent are out for their own benefits.
Agents have access to more information and are usually in a decision-making capacity.
The agency theory explains how to best organize agency relationships so as to prevent conflicts and other issues that arise between agents and principals.
As a result of the above, we see that conflicts result from clash of interests or from the information gaps between the principals and agents. To resolve these, the agency theory requires that the interests of the principal should be seen as paramount while the agent is sufficiently compensated. It primarily addresses disputes arising in two areas; first, where the principal and agents pursue different, unaligned goals, and secondly, where there's a difference in risk aversion, caused by varied risk tolerance capacities
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