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Agency theory

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Agency theory

Agency theory describes the relationship between the principal and the agent such that the agent works on behalf of the principle. Shareholders confer the control with the power to make the decision that maximizes shareholdshareholder’sAny deviation from that role indicates a deteriorating relationship between the two parties. Management buyout denotes the act of top management of buying the whole company or a controlling stake from the shareholders. This indicates that these managers are pursuing their own goals instead of the shareholders, showing a sour relation between the two parties. A company optimal capital mix usually involves a strategic combination of debt and equity. When a company is experiencing a debt for equity swap, it may mean that shareholder confidence on the management ability to create wealth for them has deteriorated and would, therefore, prefer a more certain interest on debt than dividends on their common stock. Similarly, when a company issues institutional share placement made at a significant discount to the prevailing market price usually indicates a weaker relationship between the management and the shareholders. Individual shareholders now prefer institutional shareholders in a bid to steer the company on a growth trajectory.

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