Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review

Alaa Kafa

doi:doi:10.11648/j.jfa.20251306.11

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Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review

Alaa Kafa^*

Published in Journal of Finance and Accounting (Volume 13, Issue 6)

Received: 24 September 2025 Accepted: 7 October 2025 Published: 3 December 2025

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Abstract

This literature review aims to scrutinize and elucidate the intricate theoretical and applied framework surrounding the pervasive issue of agency costs, specifically within the dynamic milieu of financial markets. The analysis delves into the foundational concept of agency costs, meticulously examining their distinct typologies, their multifaceted interpretation by market participants, and their profound economic ramifications. The genesis of this principal-agent problem is inextricably linked to the defining characteristic of the modern corporation: the separation of ownership from control. This fundamental division creates a inherent conflict of interest, wherein management (the agent) may prioritize personal goals-such as excessive perquisite consumption, empire building, or shirking-over the paramount objective of maximizing shareholder wealth (the principal). This divergence is critically intensified by pervasive information asymmetry, where managers inherently possess superior knowledge about the firm's true performance and prospects compared to dispersed owners. The theoretical underpinnings of this study are firmly rooted in the seminal contributions of Berle and Means, who first identified the implications of separated ownership and control, and Jensen and Meckling, who formally defined agency costs. The review systematically identifies and categorizes the principal manifestations of agency costs, framing them according to their association with the specific behavioral incentives and cultural-institutional characteristics of both the contracting parties and their broader economic environment. Two predominant patterns are rigorously delineated: first, the classical vertical conflict between corporate management and all shareholders, and second, the horizontal conflict between controlling shareholders (who often exert significant influence over management) and minority shareholders, who are vulnerable to expropriation through tunneling or unfair related-party transactions. For each archetype, the synthesis critically analyzes the empirical findings of previous scholarly work concerning their distinct economic consequences, which range from direct wealth transfers and suboptimal investment decisions to broader macroeconomic impacts like reduced market efficiency and impeded capital formation. Furthermore, the review proactively explores unresolved research particularly in the context of evolving market structures, regulatory landscapes, and global corporate governance norms.

Published in	Journal of Finance and Accounting (Volume 13, Issue 6)
DOI	10.11648/j.jfa.20251306.11
Page(s)	236-243
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2025. Published by Science Publishing Group

Keywords

Agency Costs, Agency Theory, Financial Markets, Controlling Shareholders, Minority Shareholders, Corporate Governance, Economic Consequences, Market Inefficiency

References

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[2]	Banchit, A., & Locke, S. Conflicts between shareholders in ASEAN 5 M&A. Pertanika Journal of Social Sciences and Humanities. 2016. 24(27). 27-46.
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[4]	Chen, F., Huyghebaert, N., Lin, S., & Wang, L. Do multiple large shareholders reduce agency problems in state-controlled listed firms? Evidence from China. Pacific-Basin Finance Journal. 2019. 57(101203). 1-21. https://doi.org/10.1016/j.pacfin.2019.101203
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APA Style

Kafa, A. (2025). Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. Journal of Finance and Accounting, 13(6), 236-243. https://doi.org/10.11648/j.jfa.20251306.11

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ACS Style

Kafa, A. Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. J. Finance Account. 2025, 13(6), 236-243. doi: 10.11648/j.jfa.20251306.11

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AMA Style

Kafa A. Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. J Finance Account. 2025;13(6):236-243. doi: 10.11648/j.jfa.20251306.11

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@article{10.11648/j.jfa.20251306.11,
  author = {Alaa Kafa},
  title = {Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review
},
  journal = {Journal of Finance and Accounting},
  volume = {13},
  number = {6},
  pages = {236-243},
  doi = {10.11648/j.jfa.20251306.11},
  url = {https://doi.org/10.11648/j.jfa.20251306.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20251306.11},
  abstract = {This literature review aims to scrutinize and elucidate the intricate theoretical and applied framework surrounding the pervasive issue of agency costs, specifically within the dynamic milieu of financial markets. The analysis delves into the foundational concept of agency costs, meticulously examining their distinct typologies, their multifaceted interpretation by market participants, and their profound economic ramifications. The genesis of this principal-agent problem is inextricably linked to the defining characteristic of the modern corporation: the separation of ownership from control. This fundamental division creates a inherent conflict of interest, wherein management (the agent) may prioritize personal goals-such as excessive perquisite consumption, empire building, or shirking-over the paramount objective of maximizing shareholder wealth (the principal). This divergence is critically intensified by pervasive information asymmetry, where managers inherently possess superior knowledge about the firm's true performance and prospects compared to dispersed owners. The theoretical underpinnings of this study are firmly rooted in the seminal contributions of Berle and Means, who first identified the implications of separated ownership and control, and Jensen and Meckling, who formally defined agency costs. The review systematically identifies and categorizes the principal manifestations of agency costs, framing them according to their association with the specific behavioral incentives and cultural-institutional characteristics of both the contracting parties and their broader economic environment. Two predominant patterns are rigorously delineated: first, the classical vertical conflict between corporate management and all shareholders, and second, the horizontal conflict between controlling shareholders (who often exert significant influence over management) and minority shareholders, who are vulnerable to expropriation through tunneling or unfair related-party transactions. For each archetype, the synthesis critically analyzes the empirical findings of previous scholarly work concerning their distinct economic consequences, which range from direct wealth transfers and suboptimal investment decisions to broader macroeconomic impacts like reduced market efficiency and impeded capital formation. Furthermore, the review proactively explores unresolved research particularly in the context of evolving market structures, regulatory landscapes, and global corporate governance norms.
},
 year = {2025}
}

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TY  - JOUR
T1  - Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review

AU  - Alaa Kafa
Y1  - 2025/12/03
PY  - 2025
N1  - https://doi.org/10.11648/j.jfa.20251306.11
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AB  - This literature review aims to scrutinize and elucidate the intricate theoretical and applied framework surrounding the pervasive issue of agency costs, specifically within the dynamic milieu of financial markets. The analysis delves into the foundational concept of agency costs, meticulously examining their distinct typologies, their multifaceted interpretation by market participants, and their profound economic ramifications. The genesis of this principal-agent problem is inextricably linked to the defining characteristic of the modern corporation: the separation of ownership from control. This fundamental division creates a inherent conflict of interest, wherein management (the agent) may prioritize personal goals-such as excessive perquisite consumption, empire building, or shirking-over the paramount objective of maximizing shareholder wealth (the principal). This divergence is critically intensified by pervasive information asymmetry, where managers inherently possess superior knowledge about the firm's true performance and prospects compared to dispersed owners. The theoretical underpinnings of this study are firmly rooted in the seminal contributions of Berle and Means, who first identified the implications of separated ownership and control, and Jensen and Meckling, who formally defined agency costs. The review systematically identifies and categorizes the principal manifestations of agency costs, framing them according to their association with the specific behavioral incentives and cultural-institutional characteristics of both the contracting parties and their broader economic environment. Two predominant patterns are rigorously delineated: first, the classical vertical conflict between corporate management and all shareholders, and second, the horizontal conflict between controlling shareholders (who often exert significant influence over management) and minority shareholders, who are vulnerable to expropriation through tunneling or unfair related-party transactions. For each archetype, the synthesis critically analyzes the empirical findings of previous scholarly work concerning their distinct economic consequences, which range from direct wealth transfers and suboptimal investment decisions to broader macroeconomic impacts like reduced market efficiency and impeded capital formation. Furthermore, the review proactively explores unresolved research particularly in the context of evolving market structures, regulatory landscapes, and global corporate governance norms.

VL  - 13
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Alaa Kafa

Faculty of Economics, Damascus University, Damascus, Syria

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http://orcid.org/0009-0007-1273-2566

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APA Style

Kafa, A. (2025). Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. Journal of Finance and Accounting, 13(6), 236-243. https://doi.org/10.11648/j.jfa.20251306.11

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ACS Style

Kafa, A. Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. J. Finance Account. 2025, 13(6), 236-243. doi: 10.11648/j.jfa.20251306.11

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AMA Style

Kafa A. Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review. J Finance Account. 2025;13(6):236-243. doi: 10.11648/j.jfa.20251306.11

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@article{10.11648/j.jfa.20251306.11,
  author = {Alaa Kafa},
  title = {Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review
},
  journal = {Journal of Finance and Accounting},
  volume = {13},
  number = {6},
  pages = {236-243},
  doi = {10.11648/j.jfa.20251306.11},
  url = {https://doi.org/10.11648/j.jfa.20251306.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20251306.11},
  abstract = {This literature review aims to scrutinize and elucidate the intricate theoretical and applied framework surrounding the pervasive issue of agency costs, specifically within the dynamic milieu of financial markets. The analysis delves into the foundational concept of agency costs, meticulously examining their distinct typologies, their multifaceted interpretation by market participants, and their profound economic ramifications. The genesis of this principal-agent problem is inextricably linked to the defining characteristic of the modern corporation: the separation of ownership from control. This fundamental division creates a inherent conflict of interest, wherein management (the agent) may prioritize personal goals-such as excessive perquisite consumption, empire building, or shirking-over the paramount objective of maximizing shareholder wealth (the principal). This divergence is critically intensified by pervasive information asymmetry, where managers inherently possess superior knowledge about the firm's true performance and prospects compared to dispersed owners. The theoretical underpinnings of this study are firmly rooted in the seminal contributions of Berle and Means, who first identified the implications of separated ownership and control, and Jensen and Meckling, who formally defined agency costs. The review systematically identifies and categorizes the principal manifestations of agency costs, framing them according to their association with the specific behavioral incentives and cultural-institutional characteristics of both the contracting parties and their broader economic environment. Two predominant patterns are rigorously delineated: first, the classical vertical conflict between corporate management and all shareholders, and second, the horizontal conflict between controlling shareholders (who often exert significant influence over management) and minority shareholders, who are vulnerable to expropriation through tunneling or unfair related-party transactions. For each archetype, the synthesis critically analyzes the empirical findings of previous scholarly work concerning their distinct economic consequences, which range from direct wealth transfers and suboptimal investment decisions to broader macroeconomic impacts like reduced market efficiency and impeded capital formation. Furthermore, the review proactively explores unresolved research particularly in the context of evolving market structures, regulatory landscapes, and global corporate governance norms.
},
 year = {2025}
}

Copy | Download

TY  - JOUR
T1  - Agency Costs in the Context of Financial Markets: Concept, Types, and Economic Consequences: A Literature Review

AU  - Alaa Kafa
Y1  - 2025/12/03
PY  - 2025
N1  - https://doi.org/10.11648/j.jfa.20251306.11
DO  - 10.11648/j.jfa.20251306.11
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 236
EP  - 243
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20251306.11
AB  - This literature review aims to scrutinize and elucidate the intricate theoretical and applied framework surrounding the pervasive issue of agency costs, specifically within the dynamic milieu of financial markets. The analysis delves into the foundational concept of agency costs, meticulously examining their distinct typologies, their multifaceted interpretation by market participants, and their profound economic ramifications. The genesis of this principal-agent problem is inextricably linked to the defining characteristic of the modern corporation: the separation of ownership from control. This fundamental division creates a inherent conflict of interest, wherein management (the agent) may prioritize personal goals-such as excessive perquisite consumption, empire building, or shirking-over the paramount objective of maximizing shareholder wealth (the principal). This divergence is critically intensified by pervasive information asymmetry, where managers inherently possess superior knowledge about the firm's true performance and prospects compared to dispersed owners. The theoretical underpinnings of this study are firmly rooted in the seminal contributions of Berle and Means, who first identified the implications of separated ownership and control, and Jensen and Meckling, who formally defined agency costs. The review systematically identifies and categorizes the principal manifestations of agency costs, framing them according to their association with the specific behavioral incentives and cultural-institutional characteristics of both the contracting parties and their broader economic environment. Two predominant patterns are rigorously delineated: first, the classical vertical conflict between corporate management and all shareholders, and second, the horizontal conflict between controlling shareholders (who often exert significant influence over management) and minority shareholders, who are vulnerable to expropriation through tunneling or unfair related-party transactions. For each archetype, the synthesis critically analyzes the empirical findings of previous scholarly work concerning their distinct economic consequences, which range from direct wealth transfers and suboptimal investment decisions to broader macroeconomic impacts like reduced market efficiency and impeded capital formation. Furthermore, the review proactively explores unresolved research particularly in the context of evolving market structures, regulatory landscapes, and global corporate governance norms.

VL  - 13
IS  - 6
ER  -

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