BibTeX
@MISC{Rampini08capital;leasing;,
author = {Adriano A. Rampini and S. Viswanathan},
title = {Capital; Leasing; Risk Management.},
year = {2008}
}
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Abstract
This paper develops a dynamic model of firm financing based on the need to collateralize promises to pay with tangible assets, leading to a unified theory of optimal investment, capital structure, leasing, and risk management. Tangible assets required for production restrict leverage. Leasing is costly, highly collateralized financing, which enables higher leverage and faster firm growth. Financing and risk management are connected as both involve promises to pay, making incomplete risk management optimal. In the cross section, more constrained firms lease more and engage in less risk management and may completely abstain, contrary to extant theory and consistent with the evidence. Dynamically, firms with low cash flows may sell assets and lease them back, and discontinue risk management. Empirically, tangible assets and leased assets are key determinants of the capital structure.
Keyphrases
risk management tangible asset capital structure low cash flow unified theory constrained firm incomplete risk management optimal key determinant faster firm growth optimal investment dynamic model cross section discontinue risk management production restrict leverage firm financing collateralized financing
