Agency Costs


DEFINITION of 'Agency Costs'

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.

BREAKING DOWN 'Agency Costs'

Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal).

Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.

  1. Shareholder

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

    1. The amount borrowed or the amount still owed on a loan, separate ...
  3. Agency Problem

    A conflict of interest inherent in any relationship where one ...
  4. Fiduciary Risk

    A type of risk that accounts for the possibility of a trustee/agent ...
  5. Agent

    1. An individual or firm that places securities transactions ...
  6. Conglomerate Merger

    A merger between firms that are involved in totally unrelated ...
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