Principal-Agent Relationship
- Principal-Agent Relationship
- An arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act.
The relationship between the principal and the agent is called the “agency,” and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract.
For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund’s prospectus.
Investment dictionary.
Academic.
2012.
Look at other dictionaries:
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Agent — The decision maker in a principal agent relationship. The New York Times Financial Glossary * * * agent a‧gent [ˈeɪdʒnt] noun [countable] 1. COMMERCE JOBS a person or company that is paid by another person or company to represent them in… … Financial and business terms
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principal — prin·ci·pal 1 / prin sə pəl/ adj 1: being the main or most important, consequential, or influential their principal place of business the principal obligor 2: of, relating to, or constituting principal or a principal the principal amount of the… … Law dictionary
