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A Theory of Asset- and Cash Flow-Based Financing

Author

Listed:
  • Barney Hartman-Glaser
  • Simon Mayer
  • Konstantin Milbradt

Abstract

We develop a dynamic contracting theory of asset- and cash flow-based financing that demonstrates how firm, intermediary, and capital market characteristics shape firms’ financing constraints. A firm with imperfect access to equity financing covers financing needs through costly sources—an intermediary and retained cash. The firm’s financing capacity is endogenously determined by either the liquidation value of assets (asset-based) or the intermediary’s going-concern valuation of the firm’s cash flows (cash flow-based). We implement the optimal contract between the firm and intermediary with both unsecured and secured debt (credit lines) in an overlapping pecking order: the firm simultaneously finances cash flow shortfalls with unsecured debt and either cash reserves (if available) or secured debt (otherwise). Improved access to equity financing increases debt capacity, thus debt and equity are dynamic complements. When the firm does well, it repays its debt in full, while when in distress, repayment dynamics mirror U.S. bankruptcy procedures.

Suggested Citation

  • Barney Hartman-Glaser & Simon Mayer & Konstantin Milbradt, 2022. "A Theory of Asset- and Cash Flow-Based Financing," NBER Working Papers 29712, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29712
    Note: CF
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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