Which practices can (or are supposed to) lower the agency costs?

I. Good company governance practices
II. Increased use of debt
III. Low levels of institutional ownership

Correct Answer: I and II

The management can fail to work towards achieving shareholder's interests for various reasons, some of them include personal agenda, growth in the company that provides difficulty in communicating information to the shareholders, and reduced incentives to the management.

I. Good governance makes sure managers' interests are better aligned with those of shareholders.

II. Higher debt levels discipline managers by forcing them to manage the company efficiently.

III. Lower levels of institutional ownership often translates into higher asymmetry in information which increases the agency costs.