DeFond (1992) operationalizes agency theory into a set of empirical proxies
for agency costs. DeFond (1992) notes that within the agency relationship there are
two aspects that, in combination, create the agency problem: (1) the divergence in preferences
of the management and shareholders with respect to management actions, and
(2) the imperfect observability of managerial actions. DeFond (1992) and others proxy
for the first aspect of the agency relationship using variables such as managerial ownership
and leverage. The primary proxy for the second aspect of the agency relationship
aspect is client size. Note that these prior studies examining the agency-based demand