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What is meant by agency costs?

C

curiousactuary

Member
What is meant by agency costs? This is in relation to the EV
 
In that context, agency cost is an example of the frictional costs which, from the shareholders' perspective, erode the value of the required capital which is locked into the company. The phrase more widely can relate to conflicts of interest between parties. It reflects the fact that the 'agent' that is using that capital (in this case, the company's management) is not the same as the 'owner' of that capital (the shareholders), and so may not take the same decisions. As stated in the course (see Chapter 18, page 9), the decisions the management of the company makes may not correspond with the decisions shareholders would make if acting in their own best interests. Hence capital that is locked into the company and being invested by the company's management would be of less value to the shareholders than if they were able to use that capital freely.
 
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