Agent

Definition

An agent is an individual or entity authorized to act on behalf of another person, known as the principal, in business transactions. In corporate finance, agents typically refer to company executives and managers working for shareholders.

5 Must Know Facts For Your Next Test

1. Agents are responsible for making decisions that align with the best interests of the shareholders.
2. The principal-agent problem arises when there is a conflict of interest between agents and principals.
3. Corporate governance mechanisms are designed to mitigate agency issues.
4. Performance-based incentives can align the interests of agents with those of shareholders.
5. Transparency and accountability are key factors in reducing agency costs.

Review Questions

• What is the role of an agent in a corporate setting?
• How does the principal-agent problem affect corporate governance?
• What methods can be used to align the interests of agents with those of the principals?

Related terms

Principal: The individual or entity for whom an agent acts and makes decisions.

Agency Costs: Expenses incurred due to conflicts of interest between principals and agents.

Corporate Governance: Systems and processes established to direct and control companies, ensuring alignment between management's actions and shareholders' interests.