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Asset liquidity, corporate investment, and endogenous financing costs

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  • Flor, Christian Riis
  • Hirth, Stefan

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.

Suggested Citation

  • Flor, Christian Riis & Hirth, Stefan, 2013. "Asset liquidity, corporate investment, and endogenous financing costs," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 474-489.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:474-489
    DOI: 10.1016/j.jbankfin.2012.09.014
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    References listed on IDEAS

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    Cited by:

    1. Schürg, Carolin V. & Bannier, Christina Evelies, 2015. "Corporate investment, debt and liquidity choices in the light of financial constraints and hedging needs," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 114561, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Financing constraints; Corporate investment; Asset liquidity; Redeployability; Liquid funds;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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