Asset liquidity, corporate investment, and endogenous financing costs

Christian Riis Flor; Stefan Hirth

doi:10.1016/j.jbankfin.2012.09.014

Asset liquidity, corporate investment, and endogenous financing costs

Christian Riis Flor, Stefan Hirth

Department of Economics and Business Economics

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

16 Citations (Scopus)

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 language	English
Journal	Journal of Banking & Finance
Volume	37
Issue	2
Pages (from-to)	474-489
Number of pages	16
ISSN	0378-4266
DOIs	https://doi.org/10.1016/j.jbankfin.2012.09.014
Publication status	Published - 2013

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10.1016/j.jbankfin.2012.09.014

Cite this

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title = "Asset liquidity, corporate investment, and endogenous financing costs",

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.",

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AU - Flor, Christian Riis

AU - Hirth, Stefan

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N2 - 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.

AB - 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.

KW - Financing constraints

KW - Corporate investment

KW - Asset liquidity

KW - Redeployability

KW - Liquid funds

U2 - 10.1016/j.jbankfin.2012.09.014

DO - 10.1016/j.jbankfin.2012.09.014

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