The Legal Meaning Of Agency And Its Implications For Finance Theory

Abstract

Agency theory in the finance literature is based on the assumption that an “agency” relationship exists between a firm’s managers, the agents, and its shareholders, the principals.  This paper demonstrates that, in a legal sense, no formal agency relationship exists between managers and shareholders.  Legal theory views managers as agents of the corporation rather than of shareholders, and the paper discusses the implications of these differences for finance theory.