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The Determinants of Corporate Liquidity in the Netherlands

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  • Bruinshoofd,Allard
  • Kool,Clemens

    (METEOR)

Abstract

We investigate the driving forces of corporate liquidity for a balanced panel of large Dutch non-financial firms during the period 1986-1997 using an error-correction framework. This framework allows a crucial distinction between short-run and long-run determinants of corporate liquidity. We conclude from our empirical estimates that long-run corporate liquidity targets exist and are based on a small number of firm characteristics. In the short run liquidity responds passively to exogenous shocks. The latter phenomenon is consistent both with buffer stock behaviour and pecking order theory. Passive liquidity behaviour does not extend to the long run, however. On average eighty percent of deviations from target is eliminated within one year. Overall, we conclude that the corporate liquidity ratio is an actively managed financial ratio and does not passively adjust to financial decisions taken elsewhere in the firm. Based on long run evidence, a pecking order theory of corporate liquidity holdings must be rejected.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 014.

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Date of creation: 2002
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Handle: RePEc:unm:umamet:2002014

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Postal: P.O. Box 616, 6200 MD Maastricht
Phone: +31 (0)43 38 83 830
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Web page: http://www.maastrichtuniversity.nl/
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Keywords: financial economics and financial management ;

References

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  1. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
  3. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
  4. Marc R. Saidenberg & Philip E. Strahan, 1999. "Are banks still important for financing large businesses?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Jul).
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  8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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  14. Haan, L. de & Koedijk, C.G. & Vrijer, E.J. de, 1994. "Buffer stock money and pecking order financing: Results from an interview study among Dutch firms," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108622, Tilburg University.
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  17. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
  18. P.A.V.B. Swamy & P.A. Tinsley & G.R. Moore, 1982. "An autopsy of a conventional macroeconomic relation: the case of money demand," Special Studies Papers 167, Board of Governors of the Federal Reserve System (U.S.).
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  20. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
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