Definition for : Agency costs

The diverging interests of the various stakeholders (Shareholders, managers, and creditors) in a company generate a number of Costs called agency Costs. These comprise: the Cost of monitoring managers' efforts (control procedures, audit systems, performance-based compensation); the Costs incurred by the agents to vindicate themselves and reassure the principals that their management is effective, such as the publication of annual reports; residual Costs. Agency Costs are also related to Shareholders' behaviour to the detriment to creditors, when the company is in financial difficulties (undertaking of risky projects, sell-off of the Assets in place, refusal to invest in NPV-positive projects).

(See Chapters Chapter 27 Measuring value creation and Chapter 34 Debt, equity and options theory of the Vernimmen)

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