Collateral, risk management, and the distribution of debt capacity

Published

Journal Article

Collateral constraints imply that financing and risk management are fundamentally linked. The opportunity cost of engaging in risk management and conserving debt capacity to hedge future financing needs is forgone current investment, and is higher for more productive and less well-capitalized firms. More constrained firms engage in less risk management and may exhaust their debt capacity and abstain from risk management, consistent with empirical evidence and in contrast to received theory. When cash flows are low, such firms may be unable to seize investment opportunities and be forced to downsize. Consequently, capital may be less productively deployed in downturns. © 2010 the American Finance Association.

Full Text

Duke Authors

Cited Authors

  • Rampini, AA; Viswanathan, S

Published Date

  • December 1, 2010

Published In

Volume / Issue

  • 65 / 6

Start / End Page

  • 2293 - 2322

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2010.01616.x

Citation Source

  • Scopus