Three essays on corporate finance

Abstract

Chapter 1 documents a negative relation between industry-wide real asset liquidity and corporate cash holdings. Firms that operate in industries with more active asset sale markets have higher real asset liquidity. These firms hold significant less cash than firms with lower asset liquidity do. The increased ability to sell assets enhances a firm’s flexibility in coping with adverse economic shock, therefore reduces the ex ante motive of saving cash to hedge against bad times. Besides, changes of cash holdings negatively correspond to prior asset liquidity shocks. Cross-sectionally, riskier firms or firms that are more likely to conduct asset sales when distressed, i.e., firms with higher cash flow risk and firms facing greater competitive pressure rather than safer firms or potential asset buyers benefit more from the increased ability to sell assets. Consequently, firms’ capital investments increase with real asset liquidity and are more sensitive to internal cash flow. Taken together, these results suggest an efficient link between a firm’s asset structure and liquidity policy.