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