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| Author: | Gryglewicz, S. |
| Title: | A theory of corporate financial decisions with liquidity and solvency concerns |
| Journal: | Journal of Financial Economics
2011 : FEB, VOL. 99:2, p. 365-384 |
| Index terms: | corporate finance decision making liquidity solvency dividends capital structure of companies models |
| Language: | eng |
| Abstract: | This paper explores the impact of liquidity (hereafter as: liq.) and solvency (as: slv.) concerns (as: crns.) on corporate finance. Presented is a tractable model of a firm that optimally chooses capital structure, cash holdings, dividends, and default while facing cash flows with long-term uncertainty and short-term liq. shocks. It is explained how changes in slv. affect liq. and also how liq. crns. affect slv. through capital structure choice. These interactions result in a dynamic cash policy with cash reserves increasing in profitability, being positively correlated with cash flows. Moreover, it is also found that liq. crns. lead to a decrease of dispersion of credit spreads. |
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