Capital Structure, Firm Liquidity and Growth

National Bank of Belgium Working Paper No. 27

29 Pages Posted: 16 Oct 2010

See all articles by NBB Submitter

NBB Submitter

National Bank of Belgium

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance; Centre for Economic Policy Research (CEPR); Sun Yat-sen University (SYSU) - Xinhua College

Date Written: May 1, 2002

Abstract

This paper is an exploration of the relationships among the firm's financial structure, its choice of liquid asset holdings, and growth. We present a theoretical model of the firm where external finance is costly and where retaining earnings as liquid assets serves a precautionary motive. One of the predictions of this model is that a long-term reliance on high levels of debt finance tends to be associated with high levels of liquid asset holding. We test this empirically by estimating the determinants of liquid asset holdings using panel data sets of Belgian and UK firms. We find evidence of a positive relation between leverage and liquid asset holding. This result leads us to identify a possible linkage from high debt to high liquidity to slow growth. In light of this we discuss the possible implications of the development of stock markets, private equity, and venture capital markets.

Suggested Citation

Submitter, NBB and Anderson, Ronald W., Capital Structure, Firm Liquidity and Growth (May 1, 2002). National Bank of Belgium Working Paper No. 27, Available at SSRN: https://ssrn.com/abstract=1691996 or http://dx.doi.org/10.2139/ssrn.1691996

NBB Submitter (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6204 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://personal.lse.ac.uk/ANDERSOR/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sun Yat-sen University (SYSU) - Xinhua College ( email )

China

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