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Asset liquidity, corporate investment, and endogenous financing costs

Christian Flor and Stefan Hirth

Journal of Banking & Finance, 2013, vol. 37, issue 2, 474-489

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.

Keywords: Financing constraints; Corporate investment; Asset liquidity; Redeployability; Liquid funds (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2013
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