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Capital structure, firm liquidity and growth

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  • Ronald W. Anderson

    () (Université Catholique de Louvain, IRES
    London School of Economics and Political Science, Department of Accounting and Finance)

Abstract

This paper is an exploration of the relationships among the firm's financial structure, its choice of liquid asset holdings, and growth. We present a theoretical model of the firm where external finance is costly and where retaining earnings as liquid assets serves a precautionary motive. One of the predictions of this model is that a long-term reliance on high levels of debt finance tends to be associated with high levels of liquid asset holding. We test this empirically by estimating the determinants of liquid asset holdings using panel data sets of Belgian and UK firms. We find evidence of a positive relation between leverage and liquid asset holding. This result leads us to identify a possible linkage from high debt to high liquidity to slow growth. In light of this we discuss the possible implications of the development of stock markets, private equity, and venture capital markets.

Suggested Citation

  • Ronald W. Anderson, 2002. "Capital structure, firm liquidity and growth," Working Paper Research 27, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200205-8
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp27.pdf
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    References listed on IDEAS

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    1. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, Oxford University Press, pages 733-771.
    2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Prajit K. Dutta & Roy Radner, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 769-798.
    5. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    6. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    8. Danny Cassimon & Peter-Jan Engelen & Hilde Meersman & Martine Van Wouwe, 2002. "Investment, uncertainty and irreversibility: evidence from belgian accounting data," Working Paper Research 23, National Bank of Belgium.
    9. Edwards,Jeremy & Fischer,Klaus, 1996. "Banks, Finance and Investment in Germany," Cambridge Books, Cambridge University Press, number 9780521566087, March.
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    Cited by:

    1. Maziar Ghasemi & Nazrul Hisyam Ab Razak, 2016. "The Impact of Liquidity on the Capital Structure: Evidence from Malaysia," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(10), pages 130-139, October.
    2. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.

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