Agency Theory

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The agency theory describes the relationship among the various stakeholders of a firm and examines the duties and conflicts of interests of the parties in the agency relationship. The principal hires the agent to run the firm on their behalf for three main reasons; firstly, they may lack the technical expertise and knowledge to run the firm; secondly, they may be too many to run the firm and therefore need to appoint someone to run it on their behalf and thirdly, they may not be present to run the firm for themselves.