Abstract

http://ssrn.com/abstract=1554843
 
 

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Precautionary Corporate Liquidity


Kaiji Chen


Emory University - Department of Economics

Zheng Michael Song


Fudan University - School of Economics

Yikai Wang


University of Zurich

February 14, 2009

Univ. of Zurich Working Paper No. 465

Abstract:     
We develop a theory of corporate liquidity demand, capturing the fact that a firm's borrowing capacity depends on news on future investment profitability. In our model, bad news on future investment profitability reduces a firm's borrowing capacity and therefore increases the need for internal finance. Consequently, the firm's cash savings respond negatively to news on future profitability. This negative correlation is strongly supported by our empirical evidence using a combined data set of Compustat and IBES. Moreover, both our simulation and empirical results show that the sensitivity of cash savings to news on future profitability is a reliable indicator of the presence of financial constraints at firm level.

Number of Pages in PDF File: 24

Keywords: News, Financial Constraint, Corporate Savings

JEL Classification: G3

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Date posted: February 20, 2010  

Suggested Citation

Chen, Kaiji and Song, Zheng Michael and Wang, Yikai, Precautionary Corporate Liquidity (February 14, 2009). Univ. of Zurich Working Paper No. 465. Available at SSRN: http://ssrn.com/abstract=1554843 or http://dx.doi.org/10.2139/ssrn.1554843

Contact Information

Kaiji Chen (Contact Author)
Emory University - Department of Economics ( email )
1602 Fishburne Drive
Atlanta, GA 30322
United States
HOME PAGE: http://userwww.service.emory.edu/~kchen30/
Zheng Song
Fudan University - School of Economics ( email )
600 GuoQuan Road
Shanghai, 200433
China
Yikai Wang
University of Zurich ( email )
Rämistrasse 71
Zürich, CH-8006
Switzerland
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