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
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
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