Question

Agent relationship between professional executives and owners of a firm can cause agency costs. What is NOT the example of agency costs?

a. monitoring costs (e.g., auditing & hiring board directors)
b. incentive costs (e.g., stock option)
c. operating costs due to low bargaining power against suppliers.
d. financial losses caused by fraudulent bookkeeping.

Answer 1

Agency costs between managers and owners of a firm can result in various expenses, but operating costs due to low bargaining power against suppliers are not considered agency costs.

Step-by-step explanation:

Agency costs refer to the costs associated with the conflict of interest between managers (professional executives) and owners of a firm. These costs arise when managers pursue their own interests instead of maximizing shareholder value. Examples of agency costs include monitoring costs (e.g., auditing and hiring board directors) and incentive costs (e.g., stock options).

However, the option c. operating costs due to low bargaining power against suppliers is not an example of agency costs. Operating costs due to low bargaining power against suppliers are unrelated to the conflict between managers and owners.