Exploring the Development of Agency Theory: Review of theory

Abstract

This article provides a comprehensive overview of agency theory, from its theoretical foundations. It first delves into the key concepts, perspectives, challenges, and problems associated with agency theory, drawing on an extensive review of existing literature. The discussion then explores the theoretical underpinnings of agency theory, scrutinizing a range of interconnected concepts and associated challenges. The article documents empirical findings that shed light on the mechanisms aimed at mitigating agency costs. The article also highlights several elements that can give rise to a conflict of interest and agency expenses, such as the division between ownership and management control, varying risk preferences, information imbalances, and ethical risks. Subsequently, it underscores several solutions that have been suggested in scholarly works. These include strengthening ownership control, promoting managerial ownership, incorporating independent board members, and establishing diverse committees, among others. These strategies are proposed as effective means of addressing agency conflicts and their associated costs. We argue that This review of the literature will improve the understanding of both practitioners and researchers, assisting in the examination and alleviation of the agency issue.