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Agency Costs Definition

Agency costs are internal expenses that arise as a result of shareholders’ (principals) and management’s (agents) conflicting interests. Agency costs relate to the costs incurred in settling this conflict and maintaining the connection.

Examples of Agency Costs

When the top management books the most expensive place or requests extra hotel upgrades while travelling, agency costs are incurred. Such activities cost the company more to operate while offering shareholders no additional advantages or benefits.

Types of Agency Cost

  • Direct Agency Cost – Corporate spending is a part of direct agency costs. It will assist management in managing shareholder spending and monitoring expenses in order to keep a close eye on actions performed by managers in order to maintain positive relations between the principle and agent.
  • Indirect Agency Cost – Indirect agency costs are the expenses incurred when opportunities are wasted due to agency issues.
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