Abstract
Agency theory is about striking the right balance between principals and their agents. In any agency relationship, the motives and desires of the agent may be different from that of the principal. For public corporations, agency theory is often called corporate governance. There is a growing awareness, however, that agency theory also applies to the investment management industry in which asset owners delegate the caretaking of their investments to asset managers. The potential misalignment of interests between asset owners and asset managers can lead to four agency costs: asymmetry of skill or alpha, asymmetry of incentives, asymmetry of liquidity, and asymmetry of risk taking.
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