Persistent High Liquidity, Ownership Structure and Firm Performance : Indian Evidence
There exist conflicting arguments as regards the role of high liquidity on firm performance. Excess liquidity reduces financing cost in presence of information asymmetry but creates agency problem as the self-serving manager may not use the liquid fund in the stockholders' best interest. The paper investigates the characteristics and performance of the persistent high liquidity firms in India in the backdrop of ownership structure for a five year period including one year prior to and one year succeeding the consistent high liquidity holding period. Empirical evidence reveals that the persistent high liquidity firms consistently post superior performance, have better growth prospect and resort to less debt financing. Ownership structure has no influence on the performance of such firms. However, consistent with trade off theory we find that persistent liquidity as a policy beyond a certain point in time may adversely impact performance. Also the firms may subsequently find difficulty in managing high growth expectation of the investors. Industry-and- size matched comparison firms with high ownership concentration tend to overinvest that might hinder performance. Nevertheless the firms meet the hindsight growth expectation of the investors