Dutch Corporate Liquidity Management: New Evidence on Aggregation

Journal of Applied Economics, Vol. 7, No. 2, pp. 195-230, November 2004

Posted: 30 Dec 2004

See all articles by Allard Bruinshoofd

Allard Bruinshoofd

Maastricht University - Department of Economics

Clemens J.M. Kool

Utrecht University - School of Economics

Abstract

In this paper we investigate Dutch corporate liquidity management in general, and target adjustment behaviour in particular. To this purpose, we use a simple error correction model of corporate liquidity holdings applied to firm-level data for the period 1977-1997. We confirm the existence of long-run liquidity targets at the firm level. We also find that changes in liquidity holdings are driven by short-run shocks as well as the urge to converge towards targeted liquidity levels. The rate of target convergence is higher when we include more firm-specific information in the target. This result supports the idea that increased precision in defining liquidity targets associates with a faster observed rate of target convergence. It also suggests that the slow speeds of adjustment obtained in many macro studies on money demand are artefacts of aggregation bias.

Keywords: Corporate liquidity demand, precautionary liquidity

JEL Classification: C33, C43, E41, G3

Suggested Citation

Bruinshoofd, Allard and Kool, Clemens J.M., Dutch Corporate Liquidity Management: New Evidence on Aggregation. Journal of Applied Economics, Vol. 7, No. 2, pp. 195-230, November 2004. Available at SSRN: https://ssrn.com/abstract=637224

Allard Bruinshoofd

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+43 388 26 85 (Phone)
+43 388 48 64 (Fax)

Clemens J.M. Kool (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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