Waiting for Capital with On-Demand Financing
We consider a firm with infrequent access to capital markets, continuous access to costly intermediary financing, and a cost of holding cash. The optimal contract is renegotiation-proof. The intermediary absorbs a share of cash-flow risk, and this share increases as firm depletes its internal cash, suggesting an overlapping pecking order. If the firm runs out of cash, it liquidates if the cash-flow is too risky, otherwise the intermediary extends financing that resembles either private equity or collateralized debt. The model helps explain trends in financial intermediation, such as the rise of private equity and the use of collateralized debt.
Konstantin Milbradt, Barney Hartman-Glaser, Simon Mayer
Milbradt, Konstantin, Barney Hartman-Glaser, and Simon Mayer. 2023. Waiting for Capital with On-Demand Financing.