Collateral and Capital Structure
Adriano A. Rampini
Duke University - Fuqua School of Business; Duke University - Department of Economics
Forthcoming, Journal of Financial Economics
AFA 2011 Denver Meetings Paper
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.
Number of Pages in PDF File: 59
Keywords: Collateral, Capital Structure, Investment, Risk Management, Leasing, Tangible Capital, Intangible Capital
JEL Classification: D24, D82, E22, G31, G32, G35Accepted Paper Series
Date posted: March 12, 2009 ; Last revised: January 17, 2013
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