Chapter 1, Problem 7DQ

Summary Introduction

To explain:The role of the agency theory and its importance in a public corporation.

Agency problem:

The agency problem refers to a situation wherein there is a conflict of interest between two parties. Generally, in the area of corporate finance, the dilemma arises in circumstances where there is a conflict of interest between the stockholders and the management of a company. The best interest for the shareholder is wealth maximization and the agency problem arises when the management is not able to fulfill it.