Agency Cost Of Debt


DEFINITION of 'Agency Cost Of Debt'

A problem arising from the conflict of interested created by the separation of management from ownership (the stockholders) in a publicly owned company. Corporate governance mechanisms, such as boards of directors and the issuance of debt, are used in an attempt to reduce this conflict of interest. However, introducing debt into the picture creates yet another potential conflict of interest because there are three parties involved: owners, managers and lenders (bondholders), each with different goals.

BREAKING DOWN 'Agency Cost Of Debt'

For example, managers may want to engage in risky actions they hope will benefit shareholders, who seek a high rate of return. Bondholders, who are typically interested in a safer investment, may want to place restrictions on the use of their money to reduce their risk. The costs resulting from these conflicts are known as the agency cost of debt.

  1. Shareholder

    Any person, company or other institution that owns at least one ...
  2. Bondholder

    The owner of a government or corporate bond. Being a bondholder ...
  3. Corporate Governance

    The system of rules, practices and processes by which a company ...
  4. Risk

    The chance that an investment's actual return will be different ...
  5. Public Company

    A company that has issued securities through an initial public ...
  6. Brand

    A distinguishing symbol, mark, logo, name, word, sentence or ...
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