Borrowing behavior under financial stress by the proprietary firm: a theoretical analysis

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 liqui...

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Bibliographic Details
Published in:Western Journal of Agricultural Economics 1987-12, Vol.12 (2), p.144-151
Main Authors: Robinson, L.J, Barry, P.J, Burghardt, W.G
Format: Article
Language:English
Subjects:
ANALISIS DE COSTOS Y BENEFICIOS
ANALYSE COUT AVANTAGE
BANKRUPTCY
Cash flow
COMPANIAS
COST BENEFIT ANALYSIS
Cost efficiency
CREDIT
CREDITO
DEBT
DETTE
DEUDAS
ECONOMIA
ECONOMICS
ECONOMIE
Equity
Expected values
Financial leverage
FIRME
FIRMS
Investment risk
LIQUIDITY
MODELE
MODELOS
RIESGO
RISK
Risk aversion
RISQUE
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Summary: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.
ISSN:0162-1912
1068-5502
2327-8277
2327-8285