Final answer:
Agency costs incurred by shareholders in the agency relationship between shareholders (owners) and management of a firm include monitoring costs, residual loss, and conflicts of interest.
Step-by-step explanation:
Agency costs are incurred by shareholders in the agency relationship between shareholders (owners) and management of a firm. These costs arise when managers may act in their own self-interest instead of maximizing shareholder value. Examples of agency costs include:
- Monitoring costs: Shareholders incur costs to monitor the actions of management and ensure they are acting in the best interest of shareholders. This can include hiring external auditors or conducting regular performance evaluations.
- Residual loss: When managers make decisions that decrease the value of the firm, shareholders bear the ultimate loss.
- Conflicts of interest: Managers may engage in actions that benefit themselves at the expense of shareholders, such as excessive executive compensation or pursuing personal business ventures that compete with the firm.