The Paradox of Liquidity
Posted: 29 Aug 1998
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: Suggested Citation
Meyers, Stewart C. and Rajan, Raghuram G., The Paradox of Liquidity. Available at SSRN: https://ssrn.com/abstract=6507
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