A Theory of Asset- and Cash Flow-Based Financing / Barney Hartman-Glaser, Simon Mayer, Konstantin Milbradt.

Format:

Book

Author/Creator:

Hartman-Glaser, Barney.

Contributor:

National Bureau of Economic Research.

Mayer, Simon.

Milbradt, Konstantin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29712.

NBER working paper series no. w29712

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We develop a dynamic contracting theory of asset- and cash flow-based financing that demonstrates how firm, intermediary, and capital market characteristics shape firms' financing constraints. A firm with imperfect access to equity financing covers financing needs through costly sources--an intermediary and retained cash. The firm's financing capacity is endogenously determined by either the liquidation value of assets (asset-based) or the intermediary's going-concern valuation of the firm's cash flows (cash flow-based). We implement the optimal contract between the firm and intermediary with both unsecured and secured debt (credit lines) in an overlapping pecking order: the firm simultaneously finances cash flow shortfalls with unsecured debt and either cash reserves (if available) or secured debt (otherwise). Improved access to equity financing increases debt capacity, thus debt and equity are dynamic complements. When the firm does well, it repays its debt in full, while when in distress, repayment dynamics mirror U.S. bankruptcy procedures.

Notes:

Print version record

January 2022.