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Dynamic liquidity management with asymmetric adjustment costs

Author

Listed:
  • Yuan, Liuchuang
  • Jiang, Jinglu
  • Mu, Congming
  • Chen, Tuyue

Abstract

We study the effects of asymmetric adjustment costs on the dynamic liquidity management of financially constrained firms. Costly reversibility of capital enhances firms’ precautionary motive, thereby inducing firms to delay paying out dividends and raising more funds each time. Costly disinvestment induces firms to sell fewer assets in the low-cash region, thereby inducing under-disinvestment. Costly reversibility of capital weakens firms’ investment needs in the high-cash region, thereby giving rise to under-investment. Asymmetric adjustment costs may be a driving factor that the sensitivity of investment to proceeds from asset sales is significantly stronger for financially constrained firms.

Suggested Citation

  • Yuan, Liuchuang & Jiang, Jinglu & Mu, Congming & Chen, Tuyue, 2023. "Dynamic liquidity management with asymmetric adjustment costs," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323007134
    DOI: 10.1016/j.frl.2023.104341
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    More about this item

    Keywords

    Asymmetric adjustment costs; Liquidity management; Asset sales; Investment; q theory;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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