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Debt Capacity (debt + capacity)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

Financial Constraints, Debt Capacity, and the Cross-section of Stock Returns

THE JOURNAL OF FINANCE, Issue 2 2009
JAEHOON HAHN
ABSTRACT Building on a model of corporate investment under collateral constraints, we develop and test a hypothesis on the differential effect of debt capacity on stock returns across financially constrained and unconstrained firms. Consistent with the hypothesis, we find that debt capacity is a significant determinant of stock returns only in the cross-section of financially constrained firms, after controlling for beta, size, book-to-market, leverage, and momentum. The findings suggest that cross-sectional differences in corporate investment behavior arising from financial constraints, predicted by theories of imperfect capital markets and supported by empirical evidence, are reflected in the stock returns of manufacturing firms. [source]

TOWARD A MORE COMPLETE MODEL OF OPTIMAL CAPITAL STRUCTURE

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2002
Roger Heine
Most corporate finance practitioners understand the trade-off involved in making effective use of debt capacity while safeguarding the firm's ability to execute its business strategy without disruption. But quantifying that trade-off to arrive at an optimal level of debt can be a complicated and challenging task. This paper develops a simulation model of capital structure that starts by generating multiple estimates of market rates (LIBOR, currency rates) and corresponding company operating cash flows. To arrive at an optimal capital structure, the model then incorporates the shareholder value effects of alternative financing decisions by directly measuring the costs of financial distress, including the costs of missed investment opportunities and higher working capital requirements. The model generates both a target credit rating and a lower fallback rating that permits a higher level of debt to maintain investments and dividends when operating cash flows are weak. As the model shows, companies with volatile cash flows and significant investment opportunities can add substantial shareholder value by establishing a fallback credit rating that is one or two notches below the target rating. The model also optimizes the mix of fixed versus floating debt, the maturity structure, and the currency composition. Another distinctive feature of the model is its ability to estimate the expected cost of alternative liability structures that can provide the liquidity insurance necessary to sustain the firm through periods of severe stress. This cost turns out to be quite small relative to the total market capitalization of the average firm. [source]

Financial Constraints, Debt Capacity, and the Cross-section of Stock Returns

MULTIPLE BANKING RELATIONSHIPS AND OVER-LEVERAGE IN ITALIAN MANUFACTURING FIRMS

THE MANCHESTER SCHOOL, Issue 2006
STEFANIA COSCI
The purpose of this paper is to shed more light on the determinants of the number of bank lending relationships. In particular we look at the link between over-leverage and the number of banking relationships for a sample of Italian manufacturing firms, distinguishing between firms with a main bank and firms without a main bank. The main result of the paper is that the number of banking relationships increases with over-leverage only for firms without a main bank. We argue that this result is consistent with the view that, when banks perform transaction lending, firms can increase their debt capacity by increasing the number of creditors, promising ex ante up to the full amount of available assets to each one of the creditors. [source]