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Collateral, Risk Management, and the Distribution of Debt Capacity
Author(s) -
RAMPINI ADRIANO A.,
VISWANATHAN S.
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01616.x
Subject(s) - collateral , debt , hedge , business , investment (military) , cash flow , risk management , monetary economics , external financing , finance , capital (architecture) , capital structure , economics , ecology , history , archaeology , politics , political science , law , biology
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.