Costs associated with the conflicts of interest between the bondholders and the shareholders of a corporation are called:
A) Legal costs
B) Bankruptcy costs
C) Administrative costs
D) Agency costs

Question

Quizplus · Accepted Answer

The conflicts of interest between the bondholders and shareholders are an example of agency costs. Agency costs are the costs incurred by a firm when conflicts of interest arise between the firm's management and its shareholders or other stakeholders. In this case, the shareholders may prioritize their own interests in maximizing profits and may take actions that are detrimental to the bondholders (who have a claim on the company's assets). Thus, the costs incurred as a result of these conflicts are known as agency costs.

Costs Associated with the Conflicts of Interest Between the Bondholders