Agency Cost

Agency cost refers to the expenses and problems that arise when there is a conflict of interest between the owners (shareholders) and the managers (agents) of a company. Since managers may not always act in the best interest of shareholders—such as pursuing personal goals or risky projects—agency costs include monitoring activities, incentive schemes, and potential suboptimal decision-making. These costs are necessary to ensure managers act in owners' best interests, but they also reduce overall company value and efficiency.