Aswath Damodaran 297
Debt and Agency Costs
Assume that you are a bank. Which of the following businesses would you
perceive the greatest agency costs?
# A Large Pharmaceutical company
# A Large Regulated Electric Utility
Why?
I would expect a grocery store to have the lowest bankruptcy costs. Customers
generally do not consider the rating or default risk of grocery stores when they
shop, but they definitely do consider both when placing an order for an airplane.
Technology companies can have high bankruptcy costs, but the costs will vary
depending upon what type of product they produce. A PC manufacturer might
be affected more than someone who manufacturers software; a company which
serves businesses might be affected more than one which creates games for
children.
