The Choice of Corporate Liquidity and Corporate Governance

Posted: 23 Mar 2009

See all articles by Hayong Yun

Hayong Yun

Michigan State University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

In this paper, I study how corporate governance influences firms’ choices between cash and lines of credit. Stakeholders may disagree about firms’ liquidity choices because they differ in the allocation of ex-post control rights for the firms’ liquidity reserves. Using state-level changes in takeover protection as exogenous shocks to corporate governance, I find that firms increase cash relative to lines of credit when the threat of takeover weakens. Consistent with the theory, this tendency is weaker for firms with good internal governance. Overall, my findings suggest the choice of corporate liquidity is a channel through which corporate governance works.

Keywords: G32, G34

Suggested Citation

Yun, Hayong, The Choice of Corporate Liquidity and Corporate Governance (April 2009). The Review of Financial Studies, Vol. 22, Issue 4, pp. 1447-1475, 2009, Available at SSRN: https://ssrn.com/abstract=1365693 or http://dx.doi.org/hhn041

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Michigan State University - Department of Finance ( email )

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