Agency theory (what & why it matters)
Definition: In a corporation, principals (shareholders) delegate decision-making to agents (management). Because managers control information and may pursue their own interests, information asymmetry and conflicts of interest arise.
Key problems:
Moral hazard - (opportunistic actions not observable by owners)
Adverse selection - (managers know more about firm quality than outsiders)
Agency costs - (monitoring, bonding, residual loss)
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