The Choice of Corporate Liquidity and Corporate Governance
Posted: 23 Mar 2009
There are 2 versions of this paper
The Choice of Corporate Liquidity and Corporate Governance
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: Suggested Citation