agency cost

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Agency Costs

Costs that arise from the inefficiency of a relationship between an agent and a principal. In a publicly-traded company, agency costs may arise because the company's executives (the agents) may act in their own interest in a way that is detrimental to shareholders (the principals). For example, they may raise their own salaries to an unrealistic level. Agency costs are best reduced by providing appropriate incentives to align the interests of both agents and principals.

agency cost

a form of failure in the contractual relationship between a PRINCIPAL (the owner of a firm or other assets) and an AGENT (the person contacted by the principal to manage the firm or other assets). This failure arises because the principal cannot fully monitor the activities of the agent. Thus there is a possibility that an agent may not act in the interests of his principal, unless the principal can design an appropriate reward structure for the agent that aligns the agent's interests with those of the principal.

Agency relations can exist between firms, for example, licensing and franchising arrangements between the owner of a branded product (the principal) and licensees who wish to make and sell that product (agents). However, agency relations can also exist within firms, particularly in the relationship between the shareholders who own a public JOINT-STOCK COMPANY (the principals) and salaried professional managers who run the company (the agents). Agency costs can arise from slack effort by employees and the cost of monitoring and supervision designed to deter slack effort. See PRINCIPAL-AGENT THEORY, CONTRACT, TRANSACTION, DIVORCE OF OWNERSHIP FROM CONTROL, MANAGERIAL THEORIES OF THE FIRM, TEAM PRODUCTION.

References in periodicals archive ?
In this way, compensation will reflect the value, complexity and sophistication of services provided rather than being based on deconstructed agency cost and profit components.
I link firm investment in accruals/long-term asset accruals to agency theory (Jensen, 1986; Jensen 2005) and document evidence that the empire-building agency cost (over-investment) may partially explain the negative association between accruals/long-term asset accruals and future profitability.
82) Yet, the problem of agency cost and administrative inefficiency is now far more prominent than it ever was in colonial times.
They recognise that major shareholders have important roles in reducing agency cost of listed companies, and specific types of shareholders played a significant role in shaping the corporate governance structures.
Our definition of agency costs due to the separation of ownership and control is consistent with the agency cost definition in Jensen and Meckling, and our proxy for those costs is also consistent with their definition.
The agency cost theory is premised on the idea that the interests of the company's Managers and its shareholders are not perfectly aligned.
The main theories related to the association between dividend policy and information asymmetry are agency cost, signalling, and pecking order theories.
rights, and amendment rules from an agency cost perspective.
an agency cost analysis to argue that such manipulation carries risks of
a firm's capital structure, from the agency cost construct, based
MPs are furious the agency cost pounds 65million to set up but only managed to claw back pounds 23million worth of criminal proceeds.
Most DOD components implemented the health benefit cost provision using a process designed to ensure that private sector proposals include an amount for employee health benefits at least equal to the amount that Office of Management and Budget Circular A-76 requires to be added to agency cost estimates to account for employee health benefits.

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