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Household liquidity and incremental financing decisions:theory and evidence

Cunha, M Ricardo and Lambrecht, B M and Pawlina, G (2011) Household liquidity and incremental financing decisions:theory and evidence. Journal of Business Finance and Accounting, 38 (7-8). pp. 1016-1052. ISSN 1468-5957

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    Abstract

    In this paper we develop a stochastic model for household liquidity. In the model, the optimal liquidity policy takes the form of a liquidity range. Subsequently, we use the model to calibrate the upper bound of the predicted liquidity range. Equipped with knowledge about the relevant control barriers, we run a series of empirical tests on a panel data set of Dutch households covering the period 1992-2007. The results broadly validate our theoretical predictions that households (i) exhaust most of their short-term liquid assets prior to increasing net debt, and (ii) reduce outstanding net debt at the optimally selected upper liquidity barrier. However, a small minority of households appear to act sub-optimally. Poor and vulnerable households rely too frequently on expensive forms of credit (such as overdrafts) hereby incurring substantial amounts of fees and fixed borrowing costs. Elderly households and people on social benefits tend to accumulate too much liquidity. Finally, some households take on expensive short-term credit while having substantial amounts of low-yielding liquid assets.

    Item Type: Article
    Journal or Publication Title: Journal of Business Finance and Accounting
    Additional Information: The definitive version is available at www.blackwell-synergy.com
    Uncontrolled Keywords: household finance ; liquidity management ; net debt ; Brownian motion
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 45762
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:37
    Refereed?: Yes
    Published?: Published
    Last Modified: 09 Apr 2014 22:36
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/45762

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