The Choice of Corporate Liquidity and Corporate Governance

Abstract:     
In this paper, I study how corporate governance influences firms' choices between cash and lines of credit. Stakeholders may disagree about firms' liquidity choices because they differ in the allocation of ex-post control rights for the firms' liquidity reserves. Using state-level changes in takeover protection as exogenous shocks to corporate governance, I find that firms increase cash relative to lines of credit when the threat of takeover weakens. Consistent with the theory, this tendency is weaker for firms with good internal governance. Overall my findings suggest the choice of corporate liquidity is a channel through which corporate governance works.

Number of Pages in PDF File: 48

Keywords: corporate liquidity, corporate governance, cash holdings, lines of credit

JEL Classification: G30, G32, G34

working papers series