Question

Hello, i need your support to solve below task,,

Briefly explain the term agency costs as related to a corporation. Here you have to explain what are agency costs and why do they arise and how do they affect the value of a firm.

Answer 1

Agency costs are corporations inside costs that occur due to the competition of interests between the management team and the shareholders. The costs which are associated with solving this type of conflicts and reconstructing the relations of the partners are called as agency costs.

These costs arise when there is a difference in control and ownership. The management tries to make a decision which is not in favor of shareholder or which doesn't benefit the shareholder and the shareholder does the exact same thing from their perspective that is making decisions which benefits them.

Agency costs have a negative impact on the firm value as it grows, the stock returns decrease of the related parties, and the corporations are engaged in less effective connections that destroys a firm's value. These effects are more effective initially for some types of connection transactions, especially for fund transfers internally and giving away of loans. Further, when the agency costs increase more it also increases the chances of legal violations. Its also been confirmed that a large agency cost causes more undesirable stock market response.

# I hope I could help you with your query if I could please give a like. You need any assistance, you can revert me back in comments. Thanks :-)