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

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

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 firmÂ’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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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
Contact details of provider: Web page: http://waeaonline.org/

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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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