Risk Management with Variable Capital Utilization and Time-Varying Collateral Capacity

Guojun Chen (), Zhongjin Lu () and Siddharth Vij ()
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Guojun Chen: Independent Researcher, Hong Kong
Zhongjin Lu: Terry College of Business, University of Georgia, Athens, Georgia 30606
Siddharth Vij: Terry College of Business, University of Georgia, Athens, Georgia 30606

Management Science, 2025, vol. 71, issue 2, 1803-1823

Abstract: We build a risk management model that incorporates variable capital utilization and time-varying collateral capacity. The former lets firms optimally choose capital utilization, and hence production, which affects capital depreciation and risk exposure. The latter means firms’ ability to borrow and hedge increases with expected earnings and thus utilization. Calibrated solutions show both ingredients matter for firm value. We test the novel model predictions using a new data set of oil and gas producers. Consistent with model predictions, we find utilization is negatively correlated with firm liquidity, while hedging is positively correlated with liquidity and expected profitability.

Keywords: collateral constraint; corporate hedging; firm liquidity; expected profitability; procyclical collateral capacity; variable capital utilization (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1803-1823

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