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Collateral and capital structure

Adriano Rampini () and S Viswanathan ()

Journal of Financial Economics, 2013, vol. 109, issue 2, 466-492

Abstract: We develop a dynamic model of investment, capital structure, leasing, and risk management based on firms' need to collateralize promises to pay with tangible assets. Both financing and risk management involve promises to pay subject to collateral constraints. Leasing is strongly collateralized costly financing and permits greater leverage. More constrained firms hedge less and lease more, both cross-sectionally and dynamically. Mature firms suffering adverse cash flow shocks may cut risk management and sell and lease back assets. Persistence of productivity reduces the benefits to hedging low cash flows and can lead firms not to hedge at all.

Keywords: Collateral; Capital structure; Risk management; Leasing; Tangible assets (search for similar items in EconPapers)
JEL-codes: D24 D92 E22 G31 G32 G35 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jfinec:v:109:y:2013:i:2:p:466-492