BORROWING BEHAVIOR UNDER FINANCIAL STRESS BY THE PROPRIETARY FIRM: A THEORETICAL ANALYSIS

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

Western Journal of Agricultural Economics, 1987, vol. 12, issue 2, 8

Abstract: 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.

Keywords: Financial; Economics (search for similar items in EconPapers)
Date: 1987
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:wjagec:32236

DOI: 10.22004/ag.econ.32236

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