Financial Planning Where the Firm's Demand for Funds is Nonstationary and Stochastic

John D. Martin and George Emir Morgan
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John D. Martin: College of Business, University of Texas, Austin, Texas 78712
George Emir Morgan: Department of Finance, Insurance and Business Law, Virginia Polytechnic Institute and State University, Blacksburg, Virginia 24061

Management Science, 1988, vol. 34, issue 9, 1054-1066

Abstract: The incentive for a firm to engage in planning (prearranging) for its future financing derives from the interaction of uncertainty concerning the amount and timing of future needs and the cost of negotiating and terminating contracts in capital markets. Three conditions on relative costs and probability distributions are identified under which no financial slack should be raised. If those conditions are not met, then under one set of reasonable assumptions the optimum amount of slack will be more than the largest possible future need. The model allows for surprises which can cause upward or downward (in contrast to EOQ models) revisions in the future regarding the optimal level of slack to continue to carry.

Keywords: planning; financial slack; contracting costs (search for similar items in EconPapers)
Date: 1988
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