Dynamic liquidity management with asymmetric adjustment costs

We study the effects of asymmetric adjustment costs on the dynamic liquidity management of financially constrained firms. Costly reversibility of capital enhances firms' precautionary motive, thereby inducing firms to delay paying out dividends and raising more funds each time. Costly disinvestment induces firms to sell fewer assets in the low-cash region, thereby inducing under-disinvestment. Costly reversibility of capital weakens firms' investment needs in the high-cash region, thereby giving rise to under-investment. Asymmetric adjustment costs may be a driving factor that the sensitivity of investment to proceeds from asset sales is significantly stronger for financially constrained firms.

Automated summary

This study examines the impact of asymmetric adjustment costs on dynamic liquidity management in financially constrained firms. The findings reveal that costly reversibility of capital strengthens firms' precautionary motive, leading to delayed dividend payments and increased fundraising efforts. Expensive disinvestment discourages firms from selling assets in low-cash regions, resulting in under-disinvestment. Additionally, costly reversibility of capital weakens firms' investment needs in high-cash regions, causing under-investment. Furthermore, asymmetric adjustment costs may be a key driver in intensifying the sensitivity of investment to proceeds from asset sales for financially constrained firms.