Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97174
Authors: 
Hess, Dieter
Immenkötter, Philipp
Year of Publication: 
2014
Series/Report no.: 
CFR Working Paper 14-03
Abstract: 
We estimate the debt capacity of a firm as the critical debt ratio that causes a downgrade in creditworthiness. Unused debt capacities depict the temporal access to external debt funds and measure a firm's financial flexibility. Firms with high unused debt capacities realize a larger fraction of their investment opportunity set, borrow more often, and issue higher volumes of debt. Firms that have exhausted their debt capacity issue equity or pay down debt when having a financial surplus. These patterns of actively using and restoring unused debt capacities imply that preserving financial flexibility is of first-order importance in corporate finance.
Document Type: 
Working Paper

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