Firm behavior under illiquidity risk

✍ Scribed by Eric A. DeVuyst; Justin Garosi; Jiahong Wu

• Publisher: Elsevier Science
• Year: 2011
• Tongue: English
• Weight: 210 KB
• Volume: 24
• Category: Article
• ISSN: 0893-9659
• DOI: 10.1016/j.aml.2010.12.012

✦ Synopsis

We develop a model of firm behavior in the presence of risk, resource constraints, and a cash flow constraint. Given imperfect capital markets, the producer confronts an uncertain cash flow. Utilizing chance constrained programming, we show that an increase in aversion to liquidity risk can cause an increased allocation to high-risk production alternatives. With a binding cash flow constraint, risk-averse firms appear to demonstrate risk-seeking behavior over losses and risk-averse behavior over gains.