Managers of companies with overvalued stocks often give the impression of achieving improved performance; however, their actions commonly sacrifice firm equity in the long run. The concept of agency costs of overvalued equity was first proposed by Jensen (2004, 2005), and since that time a number of studies have presented indirect evidence to support his claims. In contrast, this study tests Jensen's arguments directly, by examining the relationship between overvalued equity and agency costs. Data were collected on companies publicly traded on the Taiwan Stock Exchange and the Gre Tai Securities Market between 2001 and 2007. Multivariate regression analysis provided moderate support for our proposition that overvalued equity represents a further proxy of agency costs.