Agency costs occur when managers choose the easiest form of financing over the value maximising capital structure.

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Agency costs refer to the costs incurred by a firm due to conflicts of interest between the managers and the shareholders. These conflicts arise because managers may prioritize their own interests over the interests of the shareholders. In case of capital structure decisions, managers may choose a financing option that is easier for them to manage or has less constraints, even if it is not the option that maximizes shareholder value. This results in agency costs.

Agency Costs Occur When Managers Choose the Easiest Form of Financing