Agency cost
Agency cost (alternatively known as agency problem) is an expense, either direct or indirect, that is borne by a principal as a result of having delegated authority to an agent. An example is the costs borne by shareholders to encourage managers to maximize a firm's stock price rather than act in their own self-interests. These costs may also arise from lost efficiency and the expense of monitoring management to ensure that debt holders' rights are protected.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Agency cost or agency problem. An expense, either direct or indirect, that is borne by a principal as a result of having delegated authority to an agent. An example is the costs borne by shareholders to encourage managers to maximize a firm's stock price rather than act in their own self-interests. These costs may also arise from lost efficiency and the expense of monitoring management to ensure that debt holders' rights are protected.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
