Question

What are the agency costs associated with debt? How can they be mitigated?

Answer 1

Agency cost of debt is surge in the cost of debt when the interest of the shareholders and management gets separated in a publicly owned company. This secenario arises when the investors( shareholders) think that the management may take a risky decision which may affect their interest.

It can be mitigated by following:

1.Wthe agents have been given incentives to act in the best interest of the principal the agency cost of debt can be reduced.

2. The above incentive can be given either on monetary or non monetary basis.

3. It can be reduced by following proper accounting procedures

4. Establishment of ideal budgets