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 ?
As a result, the agency cost problem is "most severe when the interests or values of the principal and agent [have] diverge[d] substantially, and information monitoring is costly.
The regression was estimated and it was found that most of the firms in the industry have consistent dividend history so fewer chances of agency cost.
According to this interpretation, dividend is not a messenger about expected profitability, but is used to mitigate an agency cost.
308) defined agency cost as a sum of the following three:
Within the framework of the Agency theory, the reasons for the agency cost for the ownership can be known to one or more of the following management behaviors:
Because solving the shareholder-manager agency cost problem aggravates shareholder-creditor agency costs, I focus on implications for creditors.
A negative announcement-period return is a direct agency cost, because it results in an immediate loss of wealth to shareholders and because self-interested shareholders would not undertake an acquisition that resulted in a decrease in their own wealth.
The main theories related to the association between dividend policy and information asymmetry are agency cost, signalling, and pecking order theories.
Davidson (2003) Agency Costs, Ownership Structure and Corporate Governance Mechanisms.
They were fined 45,000 and ordered to pay Environment Agency costs of 24,762.
One of the key areas of overspend is on agency costs, which, in the 11 months up to the end of February, rose from PS33.
Estate agency costs, stamp duty and conveyancing fees are linked to the property purchase price.

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