agency costs

Agency costs

The incremental costs of having an agent make decisions for a principal.

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 costs

the failure of employees (as ‘agents’), hired by the owners (the ‘principals’) of a business, to fully comply with the terms and responsibilities stipulated in their CONTRACT OF EMPLOYMENT. For example, operatives may ‘shirk’, indulging in time wasting (long tea breaks etc) thus leading to a loss of potential output. The companies executive directors may fail to put shareholder interests first and pursue other BUSINESS OBJECTIVES of more ‘value’ to themselves. See PRINCIPAL-AGENT THEORY.

Strategists are concerned not only with agency costs (internal to the firm) but also with the TRANSACTION COSTS of using external markets. Together these can be important considerations in influencing the extent of VERTICAL INTEGRATION/DISINTEGRATION.

References in periodicals archive ?
Davidson (2003) Agency Costs, Ownership Structure and Corporate Governance Mechanisms.
13) Principals can combat this downside and avoid agency costs if they have the tools and resources needed to prevent their agents from getting sidetracked in the pursuit of the principal's interests.
They were fined 45,000 and ordered to pay Environment Agency costs of 24,762.
Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios.
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.
Within agency theory, corporate governance mechanisms align managers' interests with shareholders' interests in order to mitigate the agency costs of free cash flows.
Estate agency costs, stamp duty and conveyancing fees are linked to the property purchase price.
Theoretical and empirical literature has shown that firms adjust their capital structure to debts in response to higher agency costs (Jensen, 1986).
Jensen and Meckling (1976) in their seminal work on the principal-agent problem, defined the agency costs that occurred in relation to the separation of ownership and control.
We do acknowledge these external placements cost significantly more than internal foster placements, up to two or three times more when there are additional agency costs factored in.
their idiosyncratic vision, investors seek protection from agency costs.
It discusses derivative actions cases before Company Law 2005; why derivative actions should play a role in monitoring management and how they should be improved, including the double agency costs in China and the non-legal mechanisms and legal protections; the relationship between direct actions and derivative actions; reform; and funding issues.

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