Agency theory helps explain the relationship between principals and agents. An agency relationship occurs whenever an individual or entity (the principal) hires an agent to act in the principal’s best interest. Agency relationships can occur in many contexts. For example, athletes and movie stars often hire agents to promote their interests, including their financial interests in contract negotiations. Agency theory is primarily concerned with for-profit organizations and explains how shareholders act as principals by hiring managers to serve as agents on their behalf. In some cases, the owners and the managers can actually be the same individuals. But in large, publicly traded corporations, there is almost always a separation between the owners and managers of the firm. Because of this separation of ownership and control, ...

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