1995/06/01 by S. C. Myers, Stewart C. Myers, Raghuram G. Rajan +1 · 1 citation
Economics, Econometrics and Finance · #Economic theories and models
paper · doi:10.1162/003355398555739
The more liquid a firm's assets, the greater their value in a short-notice liquidation. It is generally thought that a firm should find it easier to raise external finance against more liquid assets. This paper focuses on the dark side of liquidity: greater asset liquidity reduces the firm's ability to commit to a specific course of action. As a result, greater asset liquidity can, in some circumstances, reduce the firm's capacity to raise external finance. Firms with “excessively” liquid assets are in the best position to finance illiquid projects. This leads us to a theory of financial intermediation and disintermediation based on the liquidity of assets.