Financial Flexibility: At What Cost?

Firms strategically borrow in different locations. Approximately one-quarter of Peruvian companies with operations in multiple areas source their financing from more than one province. Mining windfalls generate finance supply shocks, leading to the provision of more credit at lower average rates, an...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2021-02, Vol.56 (1), p.249-282
Main Authors: Garmaise, Mark J., Natividad, Gabriel
Format: Article
Language:English
Subjects:
Banks
Borrowing
Commercial credit
Companies
Finance
Financial institutions
Financing
Flexibility
Lenders
Loans
Markets
Mining
Provinces
Psychological distress
Quantitative analysis
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Summary:Firms strategically borrow in different locations. Approximately one-quarter of Peruvian companies with operations in multiple areas source their financing from more than one province. Mining windfalls generate finance supply shocks, leading to the provision of more credit at lower average rates, and we show that firms exploit geographic financial flexibility by concentrating their borrowing in booming locations. Firms are less likely to initiate borrowing in new markets when their current borrowing provinces are thriving. The pursuit of flexibility in borrowing markets, however, degrades a firm’s relationships with its existing lenders, thereby heightening its risk of future financial distress.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109020000010