Risk, capital requirements, and the asset structure of companies

Abstract

Purpose

Financial institutions have been subject to minimum capital requirements for considerable time while other companies do not face any such regulation. This paper investigates the capital requirements of companies and how it should relate to the assets of a company.

Design/methodology/approach

The theoretical approach in this paper integrates aspects of liquidity, asset characteristics and capital requirements into a single setting to address the problem of capital requirements for non‐financial companies.

Findings

The paper develops a framework in which the impact losses have on the future performance of the company are used to develop three categories of capital and suggest a measure for each category. The paper then relates these categories to properties of the assets the capital should be invested in, which include aspects of liquidity as well as the source of this capital. It is finally pointed out how cost considerations can be used to obtain the optimal asset and capital structure of a company.

Research limitations/implications

This paper presents the conceptual basis for the determination of capital requirements of companies and future research is needed to formalize the ideas presented here more thoroughly and gain additional insights into the relationship to the asset structure.

Practical implications

The results of this paper can be used by companies as a first guide towards deciding on their capital requirements, taking into account the properties of the assets they invest their capital in and how to optimize their capital structure.

Originality/value

The paper provides a first insight into the relationship between capital requirements, asset structure, and risks for non‐financial companies.

Citation

Krause, A. (2006), "Risk, capital requirements, and the asset structure of companies", Managerial Finance, Vol. 32 No. 9, pp. 774-785. https://doi.org/10.1108/03074350610681961