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Identifying the value of liquidity : cash flow volatility, real asset liquidity and the implied cost of equity capital

Roddenhof, C.H.R.J (2019) Identifying the value of liquidity : cash flow volatility, real asset liquidity and the implied cost of equity capital.

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Abstract:In the past three decades, a postmodern view of financial policy has emerged. This paradigm accepts the key insights of Modigliani and Miller, that value is created when companies make good investments and goes further by treating financial policy as critical in enabling companies to make valuable investments. Acknowledging the importance of understanding the accessibility to financing and the mechanisms underlying the components of capital structure, this study examines the relationships between cash flow volatility, real asset liquidity and the cost of equity capital. The aim of this study is to examine the extent to which the liquidity of a firm’s assets reduces the impact of cash flow volatility on the cost of equity capital. On the basis of quintile mean comparisons and ordinary least squares regressions with heteroscedasticity consistent standard errors, the data of 5519 firms have been analyzed. While controlling for several potential confounding variables, the analyses showed that cash flow volatility is positively related to the cost of equity capital, that real asset liquidity is negatively related to the cost of equity capital, and, most important, that real asset liquidity reduces the impact of cash flow volatility on the cost of equity capital. The beneficial effect of real asset liquidity is stronger for firms that have greater incentives to restructure. Based on the results, the conclusion is that real asset liquidity on its own and in the interaction with cash flow volatility is an important and economically relevant determinant of the cost of equity capital. Further research is needed to examine the relationship of the findings with time-varying effects such as the economic state. This study mainly contributes to the literature by adding a piece of knowledge to the unsolved identification of the value of liquidity.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/80193
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