A theory of corporate financial decisions with liquidity and solvency concerns
This paper studies the impact of both liquidity and solvency concerns on corporate finance. I present a tractable model of a firm that optimally chooses capital structure, cash holdings, dividends, and default while facing cash flows with long-term uncertainty and short-term liquidity shocks. The model explains how changes in solvency affect liquidity and also how liquidity concerns affect solvency via capital structure choice. These interactions result in a dynamic cash policy in which cash reserves increase in profitability and are positively correlated with cash flows. The optimal dividend distributions implied by the model are smoothed relative to cash flows. I also find that liquidity concerns lead to a decrease of dispersion of credit spreads.
Year of publication: |
2011
|
---|---|
Authors: | Gryglewicz, Sebastian |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 99.2011, 2, p. 365-384
|
Publisher: |
Elsevier |
Keywords: | Financial distress Capital structure Cash holdings Dividends Financing constraints |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Dynamic signaling with stochastic stakes
Gryglewicz, Sebastian, (2022)
-
A theory of corporate financial decisions with liquidity and solvency concerns
Gryglewicz, Sebastian, (2011)
-
Optimal investment in learning-curve technologies
Seta, Marco Della, (2012)
- More ...