The Paradox of Liquidity

45 Pages Posted: 13 Jun 2000 Last revised: 23 Jul 2022

See all articles by Stewart C. Myers

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Date Written: June 1995

Abstract

The more liquid a company's assets, the greater their value in a short-notice liquidation. Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focusses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action. It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation.

Suggested Citation

Myers, Stewart C. and Rajan, Raghuram G., The Paradox of Liquidity (June 1995). NBER Working Paper No. w5143, Available at SSRN: https://ssrn.com/abstract=225208

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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Raghuram G. Rajan

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