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Borrowing Behavior Under Financial Stress By The Proprietary Firm: A Theoretical Analysis

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  • Robison, Lindon J.
  • Barry, Peter J.
  • Burghardt, William G.

Abstract

This paper extends finance theory under risk to account for borrowing behavior under financial stress conditions. As the financial stress level for the firm increases, the role of credit or unused borrowing capacity changes. With a strong equity position, credit is valued as a reserve to avoid liquidation costs resulting from the sale of fixed assets to meet cash flow obligations. As the financial stress on the firm increases the model demonstrates the firm's willingness to reduce credit reserves and increase its financial leverage in order to increase its probability of survival. These results are derived in a tractable framework by describing risky alternatives in terms of expected values and variances.

Suggested Citation

  • Robison, Lindon J. & Barry, Peter J. & Burghardt, William G., 1987. "Borrowing Behavior Under Financial Stress By The Proprietary Firm: A Theoretical Analysis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(2), pages 1-8, December.
    • Handle: RePEc:ags:wjagec:32236
    DOI: 10.22004/ag.econ.32236
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    References listed on IDEAS

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    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Kim, E Han, 1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity," Journal of Finance, American Finance Association, vol. 33(1), pages 45-63, March.
    3. Meyer, Jack & Robison, Lindon J., 1986. "A Consistency Condition For Expected Utility And Mean Variance Analysis," 1986 Annual Meeting, July 27-30, Reno, Nevada 278153, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Burghardt, William G. & Robison, Lindon J., 1984. "Theoretical And Empirical Issues Associated With Credit Management, Liquidation And Bankruptcy," 1984 Regional Committee NC-161, October 31-November 1, 1984, St. Louis, Missouri 140846, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    5. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
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    Citations

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    Cited by:

    1. William E. Foster & Gordon C. Rausser, 1991. "Farmer Behavior under Risk of Failure," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(2), pages 276-288.
    2. Ahrendsen, Bruce L. & Collender, Robert N., 1989. "Leverage Decisions In The Presence Of Bankruptcy Laws," Department of Economics and Business - Archive 259451, North Carolina State University, Department of Economics.
    3. Robison, Lindon J., 1994. "Expanding The Set Of Expected Utility And Mean Standard Deviation Consistent Models," 1994 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses Risk, Technical Committee Meeting, March 24-26, 1994, Gulf Shores State Park, Alabama 271676, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    4. Love, H. Alan & Karp, Larry, 1988. "The Effect of Anticipated Farm Failure on the.Agricultural Land Market," 1988 Annual Meeting, August 1-3, Knoxville, Tennessee 270186, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Atwood, Joseph A. & Buschena, David E., 2003. "Evaluating the magnitudes of financial transactions costs on risk behavior," Agricultural Systems, Elsevier, vol. 75(2-3), pages 235-249.
    6. Wu, Feng & Guan, Zhengfei, 2008. "Farm Capital Structure Choice under Credit Constraint: Theory and Application," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6130, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Jerome L. Stein, 2003. "Stochastic Optimal Control Modeling of Debt Crises," CESifo Working Paper Series 1043, CESifo.
    8. Just, Richard E. & Zilberman, David, 1992. "In Defense Of Fence To Fence: Can The Backward Bending Supply Curve Exist?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(2), pages 1-9, December.
    9. Collins, Robert A. & Gbur, Edward E., 1991. "Risk Analysis For Proprietors With Limited Liability: A Mean- Variance, Safety- First Synthesis," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(1), pages 1-7, July.
    10. Moss, Charles B. & Mishra, Ashok K. & Uematsu, Hiroki, 2012. "Capital Structure in Modern American Agriculture: Evidence from a National Survey," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124727, Agricultural and Applied Economics Association.
    11. Barry, Peter J., 1990. "Issues In Farm Level Modeling," 1990 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk Meeting, January 28-31, 1990, Sanibel Island, Florida 271537, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    12. Janssen, Larry & Peterson, Scott & Pflueger, Burton, 1989. "Characteristics of Chapter 12 Farm Reorganization Bankruptcy Filings and Approved Reorganization Plans," Economics Staff Papers 232166, South Dakota State University, Department of Economics.
    13. Collins, Robert A. & Gbur, Edward E., 1991. "Borrowing Behavior Of The Proprietary Firm: Do Some Risk-Averse Expected Utility Maximizers Plunge?," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(2), pages 1-8, December.

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