Productivity and liquidity management under costly financing |
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| Affiliation: | 1. University of Notre Dame, 3079 Jenkins Nanovic Hall, Notre Dame, IN 46556, United States;2. University of Notre Dame, 3045 Jenkins Nanovic Hall, Notre Dame, IN 46556, United States;3. Hong Kong Monetary Authority (HKMA), 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong;1. Business School, Beijing Wuzi University, #321 Fuhe Street, Tongzhou District, Beijing 101149, China;2. Faculty of Economics, Kyushu University, 6-19-1, Hakozaki, Higashiku, Fukuoka 812-8581, Japan;3. School of Management, China University of Mining and Technology, No.1, Daxue Road, Xuzhou, Jiangsu 221116, China;1. ESSEC Business School, France;2. Cass Business School, City, University of London, United Kingdom;1. King''s College London, London WC2B 4BG, UK;2. University of Cyprus, Nicosia, Cyprus;3. MIT Sloan School of Management, Cambridge, MA, USA;2. University of Zurich, Switzerland;3. Bocconi University and ICRIOS, Italy;5. Santa Clara University, USA |
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| Abstract: | We explore theoretically and empirically the relationship between firm productivity and liquidity management in the presence of financial frictions. We build a dynamic investment model and show that, counter to basic economic intuition, more productive firms could demand less capital assets and hold more liquid assets compared to less productive firms when financing costs are sufficiently high. We empirically test this prediction using a comprehensive dataset of Chinese manufacturers and find that more productive firms indeed hold less capital and more cash. We do not, however, observe this for US manufacturers. Our study suggests a larger capital misallocation problem in markets with significant financing frictions than previously documented. |
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