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Productivity and Liquidity Management Under Costly Financing

48 Pages Posted: 15 Dec 2015 Last revised: 22 Jan 2017

Felix Zhiyu Feng

University of Notre Dame

Jianyu Lu

University of Notre Dame

Jing Wang

University of Notre Dame

Date Written: November 1, 2016

Abstract

We explore theoretically and empirically the relationship between firm productivity and liquidity management in the presence of financial frictions. We build a dynamic investment model and show that, counter to basic economic intuition, more productive firms could demand less capital assets and hold more liquid assets compared to less productive firms when financing costs are sufficiently high. We empirically test this prediction using a comprehensive dataset of Chinese manufacturers and find that more productive firms indeed hold less capital and more cash. We do not, however, observe this for U.S. manufacturers. Our study suggests a larger capital misallocation problem in markets with significant financing frictions than previously documented.

Keywords: Liquidity management, cash holding, productivity, emerging economy

JEL Classification: G31, G32, G11, G15

Suggested Citation

Feng, Felix Zhiyu and Lu, Jianyu and Wang, Jing, Productivity and Liquidity Management Under Costly Financing (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2703133 or http://dx.doi.org/10.2139/ssrn.2703133

Zhiyu Feng (Contact Author)

University of Notre Dame ( email )

3079 Jenkins-Nanovic
Notre Dame, IN 46556
United States
(574)631-0428 (Phone)

HOME PAGE: http://felixzhiyufeng.weebly.com/

Jianyu Lu

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN New South Wales 46556-5646
United States

Jing Wang

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN New South Wales 46556-5646
United States

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