The principal agent problem is an asymmetric information problem. It comes about because owners of a firm often cannot observe directly easily and accurately the key day-to-day decisions of management.
Principal(s) are owner(s) of the business with a significant equity stake
Overcoming the Principal Agent Problem
What is in the best interest of the management is not necessarily the same as the optimum interests of shareholders. Most strategies involve trying to align the aims of these different stakeholders.
Exam Technique on the Principal Agent Problem - revision video
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