Dynamic liquidity management with asymmetric adjustment costs

Liuchuang Yuan, Jinglu Jiang, Congming Mu and Tuyue Chen

Finance Research Letters, 2023, vol. 58, issue PA

Abstract: We study the effects of asymmetric adjustment costs on the dynamic liquidity management of financially constrained firms. Costly reversibility of capital enhances firms’ precautionary motive, thereby inducing firms to delay paying out dividends and raising more funds each time. Costly disinvestment induces firms to sell fewer assets in the low-cash region, thereby inducing under-disinvestment. Costly reversibility of capital weakens firms’ investment needs in the high-cash region, thereby giving rise to under-investment. Asymmetric adjustment costs may be a driving factor that the sensitivity of investment to proceeds from asset sales is significantly stronger for financially constrained firms.

Keywords: Asymmetric adjustment costs; Liquidity management; Asset sales; Investment; q theory (search for similar items in EconPapers)
JEL-codes: E22 G32 G33 G35 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323007134

DOI: 10.1016/j.frl.2023.104341

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