Financing Shortfalls and the Value of Aggregate Liquidity

40 Pages Posted: 14 Mar 2006

See all articles by Adriano A. Rampini

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Andrea L. Eisfeldt

UCLA Anderson School of Management

Date Written: January 2007

Abstract

This paper studies the level and dynamics of the value of aggregate liquidity induced by firms' financing shortfalls. We model liquidity and cash flows as internal funds available for investment in an economy where external funds are costly. We study whether the use of liquidity to hedge investment opportunities can generate substantial liquidity premia with empirically observed countercyclical properties, and show how firms' financial positions affect the value of aggregate liquidity. Cash flows affect the natural supply of liquidity and are procyclical. Thus, we argue that shortfalls between firms' financing needs and available liquid funds are more likely to occur in bad times when current cash flows are low, rendering liquidity premia countercyclical. We investigate the relationship between such shortfalls and the value of aggregate liquidity empirically using Compustat data.

Keywords: liquidity, business cycles, dynamic corporate finance, production based asset pricing

JEL Classification: G12, G32, G35

Suggested Citation

Rampini, Adriano A. and Eisfeldt, Andrea L., Financing Shortfalls and the Value of Aggregate Liquidity (January 2007). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=890352 or http://dx.doi.org/10.2139/ssrn.890352

Adriano A. Rampini

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)

HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andrea L. Eisfeldt (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

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