Seminar with Maria Chaderina, Tepper School of Business, Carnegie Mellon University

Upcoming Finance Seminar with Maria Chaderina, Tepper School of Business, Carnegie Mellon University

Maria Chaderina will present:

The Pre-Borrowing Motive: A Model of Coexistent Debt and Cash Holdings

Abstract

This paper demonstrates how costly default gives rise to the risk-averse type of behavior by firms. Firms are exposed to the risk of change in the terms of borrowing. With costly default, firms are better off hedging this risk. Hedging motivates firms to borrow earlier with long term debt and keep proceeds in cash until the funds are needed. The finding is novel in the light that the result does not rely on collateral constraints. We examine full implications of the pre-borrowing motive in the dynamic neo-classical model of the firm and characterize optimal borrowing and cash holding policies. In a calibrated version of the model cash and debt co-exist and levels are persistent in time, consistent with the data.