Agency Costs

Dictionary Says

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.
Investopedia Says

Investopedia explains '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.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Agency Problem

    A conflict of ...
  2. Agent

    1. An individual ...
  3. Principal

    1. The amount ...
  4. Shareholder

    Any person, ...
  5. Conglomerate Merger

    A merger between ...
  6. Agency Broker

    A broker that ...
  7. Fiduciary Risk

    A type of risk ...
  8. Asset Substitution Problem

    A problem that ...
  9. Underinvestment Problem

    An agency ...
  10. Brokerage Fee

    A fee charged by ...

Articles Of Interest

  1. Cash: Can A Company Have Too Much?

    Cash is something companies love to have. But if they are not using it there could be problems.
  2. Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  3. Earnings: Quality Means Everything

    It's quantity that generates all the hype, but there are more meaningful factors that gauge true performance.
  4. Retirement Savings Tips For 35- To 44-Year-Olds

    Learn how the "sandwich generation" can save for retirement while taking care of their kids and parents.
  5. Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  6. Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  7. Finding Your Investing Comfort Zone

    Choosing the right investments for you is the best way to feel comfortable with your portfolio.
  8. Investors: Rely On Your Gut

    Find out how your personality and natural instincts can direct your investment choices.
  9. Simplify Your Portfolio

    Faced with an overabundance of choices, many investors forget to stick to the basics.
  10. Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center