Agency theory views that the relationship was exist in link between the manager as an agent and owner as a principal

Agency theory views that the relationship was exist in link between the manager as an agent and owner as a principal. The relationship exist when the shareholder, who is the owner of wealth in the company engaged the agent to manage and control the wealth on their behalf. The principal-agent relationship has created a problem that the agent are not share the same interest as principal, hence conflict of interest problem arise. The principal and manager’s interest may be diverged, since agent seem the acceptance of the agent status give them opportunity in maximize their own interest and utility. The principal need to incur cost in monitoring the behaviour of the agent, so that the agent will act in the best interest of the principal. This cost incurred by the principal known as agency cost. Since separation of ownership and control between principal and agent will rise the agency cost bear by the principal, therefore, dividend policy is one of the alternative that was believed in reducing agency cost