agency risk

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Agency Risk

The risk that the management of a company will use its authority to benefit itself rather than shareholder. For instance, managers may elect to pay themselves higher salaries, which increases overhead, rather than to pay out extra profits as dividends. In a more sinister example, managers may steal the business' money.

agency risk

The possibility a firm's managers will not act in the best interest of its stockholders. For example, if managers attempt to ensure their job tenure by making low-risk investment decisions, such decisions may penalize the firm's profitability and the stockholders' return. Likewise, managers may spend the firm's money to benefit themselves rather than stockholders.
References in periodicals archive ?
We do not give full credit for this, given the agency risks and low returns.
Without decision points and criteria, the agency risks beginning new and more costly activities before it has the knowledge to determine the money and time required to complete them and whether additional investment in those activities is warranted.
This has put under the microscope a wide range of methods for managing innovation, business and agency risks among both investors and investees.
New high-tech ventures are difficult business propositions not only because the business and agency risks are high, but also because the innovation risk is high and does not conform to standard methods of risk appraisal (which appeal to the frequency limit principle).
Agency risk arises because of asymmetric information between agents (particularly between investors and investees) and different attitudes to risk.
Clearly, investors will try to reduce both market and agency risks by utilizing information (general and deal-specific) and the expertise they have acquired over the years.
Thus, since serial angels may formulate better contracts to reduce agency risks and have more experience in dealing with entrepreneurs and agency issues, we might propose that they are (relative to non-serial angels) less concerned with agency issues.
This is partly because they may have better investment contracts but also because they have more experience (and possibly more skill) in dealing with entrepreneurs of unquoted companies, and therefore may be less concerned about possible agency risks, compared to the less experienced non-serial angel.
The Fitch RAC formula quantitatively tests capital adequacy for several risks, including investment risks, reserve adequacy, exposure to large losses, expense leverage and agency risks.
Fitch's risk-adjusted capital (RAC) formula quantitatively tests capital adequacy for several risks, including investment risks, reserve adequacy, exposure to large losses, expense leverage, and agency risks.
The specific period-to-period deterioration in American Pioneer's RAC ratio was due to three issues: expense leverage and agency risks, interest rate risk of long term bonds, and business concentration in Florida.
First American's statutory surplus was adequate at year-end 1999 based on Fitch's risk-adjusted capital (RAC) formula, which quantitatively tests capital adequacy for several risks, including investment risks, reserve adequacy, exposure to large losses, expense leverage and agency risks.
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