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Liquidity and speed of leverage adjustment

Author

Listed:
  • Ly Ho

    (The University of Economics – The University of Danang, Danang, Vietnam)

  • Yue Lu
  • Min Bai

    (School of Accounting, Finance and Economics, Waikato Management Division, University of Waikato, Hamilton, New Zealand)

Abstract

This article investigates the effect of liquidity on the speed of adjustment (SOA) of corporate leverage at the individual company level. Using panel analysis of data from 35 countries between 1996 and 2016, we find that high-liquidity firms have a significantly faster SOA than less liquid firms. This result survives a series of robustness checks and holds after addressing the endogeneity concern using exogenous shocks and additional control variables. We find that the positive effect of liquidity on the SOA exists only for over-levered firms, and this impact is moderated in countries with bankruptcy codes. We further find that the positive liquidity-SOA relationship is less (more) pronounced for firms in strong (weak) institutional environments. The results provide new insights into the role of liquidity in firms’ capital structure decisions and the determinants of capital structure dynamics. JEL Classification: G12, G32

Suggested Citation

  • Ly Ho & Yue Lu & Min Bai, 2021. "Liquidity and speed of leverage adjustment," Australian Journal of Management, Australian School of Business, vol. 46(1), pages 76-109, February.
    • Handle: RePEc:sae:ausman:v:46:y:2021:i:1:p:76-109
    DOI: 10.1177/0312896220918913
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    More about this item

    Keywords

    Dynamic trade-off theory; institutional environments; leverage SOA; liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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