Asset liquidity, corporate investment, and endogenous financing costs

Christian Riis Flor, Stefan Hirth

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.

Original languageEnglish
JournalJournal of Banking & Finance
Volume37
Issue number2
Pages (from-to)474-489
ISSN0378-4266
DOIs
Publication statusPublished - 1. Feb 2013

Keywords

  • Asset liquidity
  • Corporate investment
  • Financing constraints
  • Liquid funds
  • Redeployability

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