Agency costs involve costs that are incurred from managers pursuing their own interests at the expense of shareholder value, but not costs that are incurred by shareholders to make sure that managers pursue shareholder value.

True/False

False

Explanation:

Agency cost is a term used in Administration to describe a special type of expense that arises from conflicts of interest existing in an organization. Within the context of financial management, the main agency conflicts are:

-Between shareholders and managers : Theory of the principal - agent or the problem of the principal - agent is a theoretical model of economics designed to understand management situations between unequal actors having different degrees of awareness (asymmetric information) : the person giving the order (principal) is usually located in the highest hierarchical position and awaits the solution of the task in his interests; on the other hand, the person executing the order (agent: manager or economic agent) is in the lower hierarchical position, but has more information than the principal and can use this information either in the interests of the principal or in his own interests. To solve this problem, various strategies are proposed, such as trusting relationships, general information systems, or focused incentives.

In general, to alleviate agency conflicts, shareholders bear the agency cost, which includes all the relative costs to make the interests of the managers aim to meet their own interests, which is to maximize the share price from the company. However sometimes the shareholders may want management to run the company in a fashion which increases shareholder value.

- Among shareholders and creditors.

The answer is false.

Explanation:

Agency costs involve costs that are incurred from managers pursuing their own interests at the expense of shareholder value, AND ALSO

the costs that are incurred by shareholders to make sure that managers pursue shareholder value.

Examples of agency cost on the part of managers are pursuing policies that will increase their remuneration, buying expensive status car and sometimes manipulating financial statements to make it look good to the shareholders and the public.

An example of agency cost on the part of shareholders is hiring external auditor to check the financial statement and make an opinion on its true and fairness.