Corporate Liquidity Management: A Conceptual Framework and Survey

46 Pages Posted: 5 Oct 2013 Last revised: 16 Apr 2023

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Igor Cunha

University of Kentucky

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2013

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. Much 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.

Suggested Citation

Almeida, Heitor and Campello, Murillo and Cunha, Igor and Weisbach, Michael S., Corporate Liquidity Management: A Conceptual Framework and Survey (October 2013). NBER Working Paper No. w19502, Available at SSRN: https://ssrn.com/abstract=2336367

Heitor Almeida (Contact Author)

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Murillo Campello

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Igor Cunha

University of Kentucky ( email )

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Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

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