What is direct agency cost?

Direct agency costs refer to the expenses incurred due to conflicts of interest between a company's management (agents) and its shareholders (principals). These costs can arise from management actions that do not align with shareholder interests, such as excessive executive compensation or inefficient business decisions. Additionally, direct agency costs can include monitoring expenses, such as audits and performance evaluations, aimed at ensuring that management acts in the best interests of shareholders. Overall, these costs can diminish the overall value of the firm.