Dutch Corporate Liquidity Management: New Evidence on Aggregation

W. Allard Bruinshoofd and Clemens Kool

Journal of Applied Economics, 2004, vol. 7, issue 2, 195-230

Abstract: In this paper we investigate Dutch corporate liquidity management in general, and target adjustment behaviour in particular. To this purpose, we use a simple error correction model of corporate liquidity holdings applied to firm-level data for the period 1977–1997. We confirm the existence of long-run liquidity targets at the firm level. We also find that changes in liquidity holdings are driven by short-run shocks as well as the urge to converge towards targeted liquidity levels. The rate of target convergence is higher when we include more firm-specific information in the target. This result supports the idea that increased precision in defining liquidity targets associates with a faster observed rate of target convergence. It also suggests that the slow speeds of adjustment obtained in many macro studies on money demand are artefacts of aggregation bias.

Date: 2004
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DOI: 10.1080/15140326.2004.12040609

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