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 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.


Issue Date:
1987-12
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/32236
Published in:
Western Journal of Agricultural Economics, Volume 12, Number 2
Page range:
144-151
Total Pages:
8




 Record created 2017-04-01, last modified 2017-08-24

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