Question

In finance, agency costs refer to:

Question 5 options:

	The costs incurred by shareholders in their role as agents of managers.
	The costs incurred by a partnership when it becomes an agency.
	The costs of resolving conflicts of interest between managers and shareholders.
	The costs incurred by firms when they hire agents such as lawyers and accountants.
	None of the above.

Answer 1

Agency cost refers to the cost arising out of the conflict of interest between the principles and agents in an organization.

The shareholders who are the owners of the firm are the principals and the managers are the agent. Shareholders want the managers to manage the company in a way that increases the shareholders’ value. While, the managers may wish to run the company in a way that increases their wealth and prestige even if it results in a decline in the market value of the company.

Hence, the answer is option c.

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