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The Determinants of Corporate Liquidity in the Netherlands

  • Bruinshoofd Allard
  • Kool Clemens

    (METEOR)

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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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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  1. Jack Carr & Michael R. Darby, 1980. "The Role of Money Supply Shocks in the Short-Run Demand for Money," NBER Working Papers 0524, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
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  13. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
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  15. 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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  18. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  21. repec:ner:tilbur:urn:nbn:nl:ui:12-3108622 is not listed on IDEAS
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