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Financial Flexibility: At What Cost?

Published online by Cambridge University Press:  17 April 2020

Mark J. Garmaise Open the ORCID record for Mark J. Garmaise [Opens in a new window]  and
Gabriel Natividad
Mark J. Garmaise*
Affiliation:
Garmaise, mark.garmaise@anderson.ucla.edu, UCLA Anderson School of Management
Gabriel Natividad
Affiliation:
Natividad, gabriel.natividad@udep.edu.pe, Universidad de Piura
*
Garmaise (corresponding author), mark.garmaise@anderson.ucla.edu
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Abstract

Firms strategically borrow in different locations. Approximately one-quarter of Peruvian companies with operations in multiple areas source their financing from more than one province. Mining windfalls generate finance supply shocks, leading to the provision of more credit at lower average rates, and we show that firms exploit geographic financial flexibility by concentrating their borrowing in booming locations. Firms are less likely to initiate borrowing in new markets when their current borrowing provinces are thriving. The pursuit of flexibility in borrowing markets, however, degrades a firm’s relationships with its existing lenders, thereby heightening its risk of future financial distress.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 249 - 282
Copyright
© Michael G. Foster School of Business, University of Washington 2020

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Footnotes

We thank Erik Gilje (the referee), Jarrad Harford (the editor), and audiences at New York University, Universidad de Montevideo, Universidad de Piura, and the Annual Conference of the Peruvian Central Reserve Bank for comments, and we thank Jharold Montoya, Guillermo Ramirez-Chiang, and Renzo Severino for valuable research assistance. We are grateful to the Superintendencia de Banca, Seguros y AFPs and the Ministerio de la Producción for access to the data.

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