Agency theory or principal agent theory is the relationship which involved the contractual link between the shareholders (the principals) who provide capital to the company and the management (the agent) who runs the company. . Principals will engage the agent to perform certain services on their behalf and will normally delegate some decision-making authority to agents. However, as the number of shareholders and the complexity of operations increased, the agent, who possessed the essential expertise and knowledge to operate the business and the corporation, tended to obtain increasingly effective control and to place them in a position where they were inclined to pursue their own activities. interests instead of the interest of the shareholder. Agency theory addresses three types of problems that could exist due to the separation of ownership and management and could therefore affect the value of the company later. These are the effort problem, the asset utilization problem, and the problem of different risk preferences. The first problem is the effort problem which concerns whether or not managers apply appropriate effort in running businesses in order to ...