Why would managers’ interests differ from those of shareholders?
Agency theory assumes that parties, such as manager and shareholders, will act in their own interests, that is, to maximise their own wealth. Accordingly, given separation of ownership and control, managers are expected to act in their own interests through excessive consumption of perquisites and avoidance of effort. While this may offer the manager more income for less effort, it would reduce the wealth generation for shareholders by increasing expenses for perquisites and reducing income through reduced managerial effort. The interests of managers and shareholders can also diverge because managers have shorter horizons in evaluating decisions, are more risk aversion and prefer dividend retention because it gives them control over more resources.
