Financial Theories

Introduction Investment funds operate within a framework where multiple stakeholders interact. These stakeholders include fund managers, investors, and regulatory bodies. Agency theory explains the conflicts that arise when one party (the agent) makes decisions on behalf of another (the principal). In investment funds, fund managers act as agents for investors who entrust them with capital. […]

Introduction Agency theory explains conflicts that arise when one party (the agent) makes decisions that impact another party (the principal). In banking, this dynamic appears in multiple relationships: between shareholders and managers, between depositors and bank executives, and even between regulators and financial institutions. Each relationship has its own risks, incentives, and consequences. Understanding agency

Introduction Understanding financial contracts requires a framework that accounts for the relationship between different parties. One such framework is agency theory, which helps us analyze the interactions between principals and agents. Islamic finance, with its unique risk-sharing principles, introduces variations in agency relationships. I will examine how agency theory applies to Islamic financial contracts, comparing

Corporate governance plays a critical role in managing and directing companies, with an essential focus on ensuring that companies are run efficiently, ethically, and in the best interests of stakeholders. However, within corporate governance, there is a common issue that arises, known as the “agency problem.” This problem occurs when there is a conflict of

The Agency Costs of Free Cash Flow (FCF) theory is a critical concept in corporate finance that links the allocation of resources to potential conflicts between managers and shareholders. In this article, I will walk you through the various facets of this theory, explore its implications, and illustrate how it manifests in real-world situations. Let’s

When I first started exploring corporate finance, I was intrigued by how businesses align the interests of different stakeholders. A key concept that often arose in my readings was agency cost theory. This theory delves into the costs that arise when one party (the agent) makes decisions on behalf of another party (the principal), and

When I first encountered the concept of agency costs in corporate finance, it took me a while to truly grasp its significance. It’s one of those concepts that can sound more complicated than it really is, but once you break it down, it becomes clear why it plays such a pivotal role in debt financing

Adverse selection is a concept that I find intriguing and highly relevant in both economics and finance. It describes a situation where one party in a transaction has more or better information than the other, leading to imbalances in the market. The theory plays a significant role in explaining why certain markets fail to achieve