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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Which of the following is an agency cost borne by shareholders to reduce the chance that managers act against their interests?

Monitoring cost, such as audit fees and expenses of board oversight, is an agency cost. Shareholders incur it to supervise managers and limit actions against owners' interests. Dividends, depreciation and issue expenses are ordinary financial items, not costs of controlling agent behaviour.

  1. ADividend paid out of current profits
  2. BDepreciation charged on plant
  3. CMonitoring cost such as audit fees and board oversight expensesCorrect
  4. DIssue expenses on a rights issue

Explanation

Agency costs include monitoring costs (audits, independent directors, reporting), bonding costs and residual loss. Dividends, depreciation and issue expenses are not incurred to control manager behaviour, so they are not agency costs.

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