The Determinants of Corporate Liquidity in the Netherlands

We investigate the driving forces of corporate liquidity for a balanced panel of large Dutch non-financial firms during the period 1986-1997. We hypothesize that corporate liquidity targets exist and follow from static trade-off arguments. In the short run, however, liquidity may respond passively to current developments as well, producing liquidity dynamics in line with buffer stock behaviour. We therefore estimate corporate liquidity holdings in an error correction framework and find that liquidity targets are relevant and firms make efforts to converge towards these targets even in the short run. Short run dynamics, however, are in line with buffer stock predictions