Dynamic Corporate Liquidity

65 Pages Posted: 13 Mar 2013 Last revised: 20 May 2017

See all articles by Boris Nikolov

Boris Nikolov

University of Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Lukas Schmid

University of Southern California - Marshall School of Business

Roberto Steri

University of Luxembourg

Date Written: May 19, 2017


We examine the determinants of corporate liquidity management through the lens of an estimated dynamic model of corporate investment and financing. When external finance is costly, firms can absorb shocks and cover liquidity needs by holding cash and by drawing down credit lines. In contrast to cash, we model credit lines as providing liquidity contingent on economic news, but limited by collateral constraints and covenants. The option to draw down credit lines creates value as it allows firms to take advantage of investment opportunities in an effective way, facilitating firm growth. We find that our estimated model matches well the levels and joint dynamics of cash, credit lines, leverage, equity financing and investment when firms can collateralize roughly one third of their assets. In the cross-section, the model provides novel empirical predictions and rationalizes a wide range of stylized facts regarding credit line usage, covenant violations, and cash holdings.

Keywords: Corporate liquidity, cash, credit lines, debt capacity, leverage, corporate investment, hedging

JEL Classification: G30, G31, G32, G35

Suggested Citation

Nikolov, Boris and Schmid, Lukas and Steri, Roberto, Dynamic Corporate Liquidity (May 19, 2017). Available at SSRN: https://ssrn.com/abstract=2232538 or http://dx.doi.org/10.2139/ssrn.2232538

Boris Nikolov

University of Lausanne ( email )

Lausanne, CH-1015

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Roberto Steri (Contact Author)

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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