skip to primary navigationskip to content
 

How Do Informational Frictions Affect the Firm's Choice of Asset Liquidity? The Effect of SOX Section 404

When Feb 11, 2013
from 11:00 AM to 12:30 PM
Where Cambridge Judge Business School W2.02
Contact Name
Add event to calendar vCal
iCal

Felipe Cortes, Olin Business School, Washington University in St. Louis

Abstract:

Although existing theories predict a causal link between informational frictions in financial markets and a firm’s choice of asset liquidity, the lack of an exogenous and clean measure of informational frictions hinders the precise identification of this link. Using the discontinuous requirement of financial reporting introduced by Section 404 of the Sarbanes-Oxley Act, we identify a causal effect of informational frictions on the holding of liquid assets. By employing the cash ratio as a measure of corporate liquidity, we show that firms that comply with Section 404 and provide more reliable information to the financial markets reduce their holding of liquid assets compared to observationally similar firms. In the cross-section, the reduction in asset liquidity is more pronounced among firms that face financial constraints and agency conflicts, consistent with such firms having a high opportunity cost of funds. Finally, firms that comply with Section 404 and hold less cash present a higher expenditure in R&D relative to firms not complying with the rule. This difference sheds light on the opportunity cost of holding cash.

« March 2017 »
March
MoTuWeThFrSaSu
12345
6789101112
13141516171819
20212223242526
2728293031

Upcoming events

Cambridge Finance Workshop - Erwan Morellec

May 04, 2017

Room W4.03, Cambridge Judge Business School

Cambridge Finance Workshop - Rene Stulz

May 18, 2017

Room W4.03, Cambridge Judge Business School

Cambridge Finance Workshop - Katrin Tinn

Jun 01, 2017

Room W4.03, Cambridge Judge Business School

Previous events

Upcoming events