The Paradox Of Liquidity

Stewart C. Meyers

Massachusetts Institute of Technology (MIT)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

The more liquid a company's assets, the greater their value in a short-notice liquidation. Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focuses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action. It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation.

JEL Classification: G31, G33

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Date posted: August 29, 1998  

Suggested Citation

Meyers, Stewart C. and Rajan, Raghuram G., The Paradox Of Liquidity. Available at SSRN: https://ssrn.com/abstract=6507

Contact Information

Stewart C. Meyers (Contact Author)
Massachusetts Institute of Technology (MIT)
Cambridge, MA 02139
United States
617-253-6696 (Phone)
617-258-6855 (Fax)
Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

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International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
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