Agency Cost Of Debt

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Public Company

    A company that has issued securities through an initial public ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
Related Articles
  1.  Here we take a look at how you can evaluate whether the debt will affect your investment.
    Investing Basics

    Will Corporate Debt Drag Your Stock ...

  2. Investing

    The Advantages Of Bonds

  3. Home & Auto

    The Bear On Bonds

  4. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center