Working Paper: NBER ID: w19502
Authors: Heitor Almeida; Murillo Campello; Igor Cunha; Michael S. Weisbach
Abstract: Ensuring that a firm has sufficient liquidity to finance valuable projects that occur in the future is at the heart of the practice of financial management. Yet, while discussion of these issues goes back at least to Keynes (1936), a substantial literature on the ways in which firms manage liquidity has developed only recently. We argue that many of the key issues in liquidity management can be understood through the lens of a framework in which firms face financial constraints and wish to ensure efficient investment in the future. We present such a model and use it to survey many of the empirical findings on liquidity management. \n\nMuch of the variation in the quantity of liquidity can be explained by the precautionary demand for liquidity. While there are alternatives to cash holdings such as hedging or lines of credit, cash remains "king", in that it still is the predominate way in which firms ensure future liquidity for future investments. We discuss theories on the choice of liquidity measures and related empirical evidence. In addition, we discuss agency-based theories of liquidity, the real effects of liquidity choices, and the impact of the 2008-9 Financial Crisis on firms' liquidity management.
Keywords: liquidity management; financial constraints; cash flow sensitivity; corporate finance
JEL Codes: G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial constraints (H60) | cash flow sensitivity of cash (E41) |
| cash flow sensitivity of cash (E41) | cash holdings (E41) |
| cash holdings (E41) | liquidity shocks (E44) |
| financial constraints (H60) | choice of liquidity management instruments (E41) |
| liquidity management instruments (E41) | financial condition (G32) |
| 2008-09 financial crisis (F65) | liquidity reserves (G33) |
| liquidity reserves (G33) | survival and investment (G11) |