Taming the Dark Side of Asset Liquidity: The Role of Short-Term Debt
61 Pages Posted: 26 Jan 2018
Date Written: January 24, 2018
Using one composite and five alternative measures of asset liquidity, we examine the role of short-term debt in taming the dark side of asset liquidity: the negative effect of high asset liquidity facing unsecured bondholders. Addressing the joint determination of leverage and debt maturity, the evidence from simultaneous-system-of-equations models indicates that the negative effect is mitigated by short-term debt. This mitigating role of short-term debt is further shown to be more effective during the financial crisis and for firms with poor performance, adding new evidence that short-term debt help to resolve the agency conflicts facing unsecured debtholders.
Keywords: Asset Liquidity, Leverage, Debt Maturity
JEL Classification: G30, G32, G33
Suggested Citation: Suggested Citation