Productivity and Liquidity Management Under Costly Financing

59 Pages Posted: 15 Dec 2015 Last revised: 1 Dec 2018

See all articles by Felix Zhiyu Feng

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Will Jianyu Lu

Central Bank of Chile

Jing Wang

University of Notre Dame

Date Written: May 25, 2017

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 and Lu, Jianyu and Wang, Jing, Productivity and Liquidity Management Under Costly Financing (May 25, 2017). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2703133 or http://dx.doi.org/10.2139/ssrn.2703133

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Jianyu Lu

Central Bank of Chile ( email )

Agustinas 1180
Santiago, RM 8340454
Chile
+56 22 388 2961 (Phone)

HOME PAGE: http://www.jianyulu.com

Jing Wang

University of Notre Dame ( email )

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

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