agency risk

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.

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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.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.