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Abstract
This article intends to review the theoretical aspects and empirical evidences made on agency theory. It is aimed to explore the main ideas, perspectives, problems and issues related to the agency theory through a literature survey. It discusses the theoretical aspects of agency theory and the various concepts and issues related to it and documents empirical evidences on the mechanisms that diminish the agency cost. The conflict of interest and agency cost arises due to the separation of ownership from control, different risk preferences, information asymmetry and moral hazards. The literatures have cited many solutions like strong ownership control, managerial ownership, independent board members and different committees can be useful in controlling the agency conflict and its cost. This literature survey will enlighten the practitioners and researchers in understanding, analysing the agency problem and will be helpful in mitigating the agency problem.
Keywords
Agency theory, contractual relationship, conflict of interest, agency issues, agency cost, literature survey
Introduction
Agency theory revolves around the issue of the agency problem and its solution (Jensen & Meckling, 1976; Ross, 1973). The history of agency problem dates back to the time when human civilisation practiced business and tried to maximise their interest. Agency problem is one of the age-old problems that persisted since the evolution of the joint stock companies. It cannot be ignored since every organisation possibly suffered from this problem in different forms. With the change in the time, the agency problem has taken different shapes and the literature has evidence about it. The discussion on the literature of agency theory is very much in need to understand the agency problem, its various forms and the various costs involved in it to minimise the problem.
The presence of agency issues has been widely witnessed in different academic fields. The evidences found in different fields like accounting (Ronen & Balachandran, 1995; Watts & Zimmerman, 1983) finance (Fama, 1980; Fama & Jensen, 1983; Jensen, 1986), economics (Jensen & Meckling, 1976; Ross, 1973; Spence & Zeckhauser, 1971), political science (Hammond & Knott, 1996; Weingast & Moran, 1983), sociology (Adams, 1996; Kiser & Tong, 1992), organisational behaviour (Kosnik & Bittenhausen, 1992) and marketing (Bergen, Dutta, & Walker, 1992; Logan, 2000; Tate et al., 2010). The wide existence of the agency...