NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Paradox of Liquidity

Stewart C. Myers, Raghuram G. Rajan

NBER Working Paper No. 5143
Issued in June 1995
NBER Program(s):   CF

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 focusses 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.

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Document Object Identifier (DOI): 10.3386/w5143

Published: Quarterly Journal of Economics, Vol 113, no. 3 (August 1998): 733-771.

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