The Paradox of Liquidity

Posted: 29 Aug 1998

See all articles by Stewart C. Meyers

Stewart C. Meyers

Massachusetts Institute of Technology (MIT)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Abstract

The more liquid a company's assets, the greater their value in a short-notice liquidation. Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focuses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action. It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation.

JEL Classification: G31, G33

Suggested Citation

Meyers, Stewart C. and Rajan, Raghuram G., The Paradox of Liquidity. Available at SSRN: https://ssrn.com/abstract=6507

Stewart C. Meyers (Contact Author)

Massachusetts Institute of Technology (MIT)

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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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