Asset liquidity,corporate investment,and endogenous financing costs |
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Authors: | Christian Riis Flor Stefan Hirth |
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Institution: | 1. Department of Business and Economics, University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark;2. Business and Social Sciences, Aarhus University, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark |
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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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Keywords: | G31 G32 G33 |
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