The Determinants of Corporate Liquidity: Theory and Evidence
Abstract
We model the firm's decision to invest in liquid assets when external financing is costly. The optimal amount of liquidity is determined by a tradeoff between the low return earned on liquid assets and the benefit of minimizing the need for costly external financing. The model predicts that the optimal investment in liquidity is increasing in the cost of external financing, the variance of future cash flows, and the return on future investment opportunities, while it is decreasing in the return differential between the firm's physical assets and liquid assets. Empirical tests on a large panel of U.S. industrial firms support the model's predictions.
Integrity signals
Registry
Cites
Statistics
Claims the paper makes
Claims other papers make about this one
Each is checked against this paper’s own text: does it say what the citing paper says it does?
Firms experiencing liquidity constraints often struggle to secure external funding.
“Kim, Mauer, and Sherman (1998) argue that firms experiencing liquidity constraints often struggle to secure external funding.”
From Inventory Management and Financial Performance of Listed Manufacturing Firms in Nigeria (2024) · cites this paper as Kim, Mauer, and Sherman (1998)
Cites
Corporate financing and investment decisions when firms have information that investors do not have
Myers, S. C., & Majluf, N. S. (1984) · Journal of Financial Economics · doi:10.1016/0304-405x(84)90023-0 · Cited by 18,957 · see citing works
Flagged first, then by citations
Cited by
Sorted by citations
The determinants and implications of corporate cash holdings
Opler, T. (1999) · Journal of Financial Economics · doi:10.1016/s0304-405x(99)00003-3 · Cited by 3,914 · see citing works
Zimon, G. (2021) · Encyclopedia · doi:10.3390/encyclopedia1030058 · Cited by 22 · see citing works
Inventory Management and Financial Performance of Listed Manufacturing Firms in Nigeria
Akinleye, G. T., & Adesina, O. D. (2024) · Journal of Applied And Theoretical Social Sciences · doi:10.37241/jatss.2024.116 · Cited by 5 · see citing works
- Authors
- Kim, C.-S., Mauer, D. C., & Sherman, A. E.
- Affiliations
- Southern Methodist University (US)
- Hong Kong University of Science and Technology (HK)
- Venue
- The Journal of Financial and Quantitative Analysis
- Publisher
- JSTOR
- Published
- 1998-09
- Volume
- 33
- Issue
- 3
- Pages
- 335
- ISSN
- 0022-1090 (ISSN-L)
- OpenAlex
- W1966917639
- Cited by
- 1,244
- References
- 1
- Citations by year
- 2026: 44 · 2025: 42 · 2024: 50 · 2023: 49 · 2022: 79 · 2021: 73 · 2020: 67 · 2019: 62 · 2018: 59 · 2017: 55 · 2016: 73 · 2015: 59 · 2014: 87 · 2013: 53 · 2012: 70
- FWCI
- 21.05
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Financial and Quantitative Analysis (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Working Capital and Financial Performance
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Keywords
- corporate liquidity, liquid assets, external financing costs, trade-off theory, cost of capital, investment opportunities, corporate finance
About these checks
Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.
Statistics and arithmetic are recomputed, not judged.
Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.
What counts as a claim ›How we measure confidence ›How we check this ›
Are you an author, or do you see a problem with this page? Request a review
