Which of the following does not represent an agency cost resulting from the separation of ownership from control of the firm?
A)The expense of providing management with bonuses based on profitability.
B)The cost of a company director taking a business trip to Hawaii with no potential benefit to the company.
C)The cost of a staff Christmas party designed to enhance staff morale.
D)The cost of monitoring the activities of management to keep track of its expenditures and decisions.

Question

Quizplus · Accepted Answer

The cost of a staff Christmas party designed to enhance staff morale is not an agency cost resulting from the separation of ownership from control of the firm. It may be considered as an expense for the company, but it is not related to the alignment of interests between the shareholders and the management. The other options (A, B, D) represent agency costs because they are related to the behavior of the management and its impact on the value of the firm. Providing management with bonuses based on profitability can incentivize them to focus on short-term gains at the expense of long-term value. The cost of a director taking a business trip to Hawaii with no potential benefit to the company represents a violation of the fiduciary duty of care, as the director is using company resources for personal benefit. Monitoring the activities of management is necessary to ensure that they act in the best interest of the firm, but it also represents a cost for the company.

Which of the Following Does Not Represent an Agency Cost