RFS Advance Access published online on April 19, 2008
Review of Financial Studies, doi:10.1093/rfs/hhn041
The Choice of Corporate Liquidity and Corporate Governance
University of Notre Dame
Address correspondence to Hayong Yun, Department of Finance, 242 Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556; telephone: +574-631-9322; fax: +574-631-5255; e-mail: hyun{at}nd.edu.
JEL Classification: G32, G34
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Abstract |
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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.
This paper is a revised version of the first chapter of my dissertation completed at Columbia University. I thank the members of my dissertation committee: Kenneth Ayotte, Patrick Bolton, Charles Himmelberg, Francisco Perez-Gonzalez, and especially the chairman, Suresh Sundaresan. This article has greatly benefited from comments made by Robert Battalio, Charles Calomiris, Charles Hadlock, Steven Drucker, Stuart Gillan, Victoria Ivashina, Eslyn Jean-Baptiste, Wei Jiang, Michael Kollo, Bill McDonald, Daniel Paravisini, Joshua Rauh, Matthew Rhodes-Kropf, Tano Santos, Paul Schultz, Amir Sufi, and Vikrant Vig. Additionally, this article benefited enormously from detailed comments and suggestions from the editor (Michael Weisbach) and an anonymous referee. I thank seminar participants at the Fifth Annual Trans-Atlantic Doctoral Conference (London Business School), 2006 FMA Annual Meeting, Columbia University, Michigan State University, University of Notre Dame, University of South Carolina, and York University for helpful suggestions. I also thank Kirsten Bergstrand, Hang Li, Kristen Morphew, Michelle Parad, and Ed Preuss for their data support.