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

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Author Info

  • 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.

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File URL: http://purl.umn.edu/32236
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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Western Journal of Agricultural Economics.

Volume (Year): 12 (1987)
Issue (Month): 02 (December)
Pages:

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Handle: RePEc:ags:wjagec:32236

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Web page: http://waeaonline.org/
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Related research

Keywords: Financial Economics;

References

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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. Burghardt, William G. & Robison, Lindon J., 1984. "Theoretical And Empirical Issues Associated With Credit Management, Liquidation And Bankruptcy," Proceedings:1984 Regional Committee NC-161, October 31-November 1, St. Louis, Missouri 140846, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
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Citations

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Cited by:
  1. 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(02), December.
  2. 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).
  3. 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(01), July.
  4. 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.
  5. 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.
  6. 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(02), December.
  7. Foster, William E. & Rausser, Gordon C., 1990. "Farmer behavior under risk of failure," CUDARE Working Paper Series 488R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.

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