When a firm has excessive cash, managers may make use of the funds in an inefficient manner. This is also referred to as the ________ cost of retaining cash.
A) fixed
B) agency
C) interest
D) special

Question

Quizplus · Accepted Answer

The cost of retaining excess cash is referred to as agency cost. This is because managers may not feel the pressure to invest the funds efficiently, and may instead use the cash for their own benefit or to pursue projects with lower returns. This results in a misallocation of resources, and can harm the interests of shareholders. Fixed, interest, and special costs do not fully capture this phenomenon.

When a Firm Has Excessive Cash, Managers May Make Use