Research Details

Abstract

We consider a firm with infrequent access to capital markets, continuous access to financing by a risk-averse intermediary, and a cost of holding cash. The intermediary absorbs a fraction of cash-flow risk that decreases with the firm’s liquidity reserves and acquires a stake in the firm under distress. Implementing the optimal contract suggests an overlapping pecking order. The firm simultaneously finances shortfalls with cash reserves and a credit line and sells equity to the intermediary when it runs out of cash. The model helps explain empirical facts and trends in financial intermediation, such as the rise of private equity.

Type

Working Paper

Author(s)

Konstantin Milbradt, Barney Hartman-Glaser, Simon Mayer

Date Published

2022

Citations

Milbradt, Konstantin, Barney Hartman-Glaser, and Simon Mayer. 2022. Waiting for Capital: Dynamic Intermediation in Illiquid Markets.