Borrowing Behavior Under Financial Stress By The Proprietary Firm: A Theoretical Analysis
AbstractThis 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 firmï¿½s 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.
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Bibliographic InfoArticle provided by Western Agricultural Economics Association in its journal Western Journal of Agricultural Economics.
Volume (Year): 12 (1987)
Issue (Month): 02 (December)
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CUDARE Working Paper Series
488R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
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