Which of the following most accurately defines what is meant by 'agency costs' in finance theory?
A) The costs of allowing financial intermediaries to take decisions on your behalf which may not be optimal for you
B) The direct and indirect costs of ensuring that agents (e.g. managers of firms) act in the best interests of principals (e.g. shareholders of firms)
C) The initial cost of purchasing an asset through an agent, e.g. a travel agent's fee
D) The costs of buying an asset through an agent such as a stock broker or estate agent

Question

Quizplus · Accepted Answer

Agency costs refer to the costs incurred by a principal in order to ensure that agents (e.g. managers of firms) act in the best interests of the principal (e.g. shareholders of firms). This includes direct costs such as monitoring and auditing, as well as indirect costs such as the potential loss of value due to conflicts of interest or moral hazard.

Which of the Following Most Accurately Defines What Is Meant