Corporate Demand for Liquidity
- Topics:
- Equity,
- Financial Research
- Tags:
- Cash Position,
- Finance,
- Financial Accounting,
- Investment,
- Liquidity,
- National Bureau Of Economic Research
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Overview: This paper proposes a theory of corporate liquidity demand and provides new evidence on corporate cash policies. Firms have access to valuable investment opportunities, but potentially cannot fund them with the use of external finance. Firms that are financially unconstrained can undertake all positive NPV projects regardless of their cash position, so their cash positions are irrelevant. In contrast, firms facing financial constraints have an optimal cash position determined by the value of today's investments relative to the expected value of future investments. The model predicts that constrained firms will save a positive fraction of incremental cash flows, while unconstrained firms will not.
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Format: PDF | Size: 615KB | Date: Oct 2002 | Pages: 44
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