Answer to Question #51324 in Finance for mohammed abdu

Question

When do companies incur the agency costs? Support your answer by giving an
example.

Answer 1

Managers can be encouraged to do business for the benefit of shareholders through incentives, restrictions and penalties. In this regard, there are three major categories of agency costs: 1) the costs of monitoring the activities of managers, such as the costs of the audit; 2) the costs of establishing the organizational structure, limiting the possibility of undesirable behavior of managers, such as the introduction into the board of the foreign investors; 3) opportunity costs arising in cases, where established by shareholders rules limit the actions of managers, contrary to the goal of increasing shareholder wealth. The increase in agency costs is acceptable as long as it is as a result of the measure is covered by earnings growth.