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The Interactive Impact of Liquidity Risk and Corporate Financial Decisions

Author(s)

Kehao Chen

Affiliation(s)

Jinan Xinhang Experimental Foreign Language School, China

Abstract

The present paper examines the interactive relationship of liquidity risk with corporate financial decisions and how it impacts the soundness and performance of a firm in the market that drives a specific capital structure, financing, and investment choices. Research has shown that it is extremely difficult to manage the risk around liquidity. Furthermore, liquidity risk in enterprises is greatly linked to the financial decisions. While over-dependence on debt financing dilutes the equity base in a firm and therefore increases its tendency toward higher liquidity risk, firms with fine financing strategies, tended by adequate internal capital reserves, will generally come to terms with lower liquidity risk. This paper will build on the central role that liquidity management plays in corporate financial decision-making and indicate clearly that, considering market fluctuation and financial crises in general, enterprises should optimize their liquidity management to improve the firm's elasticity about finance.

Keywords

Liquidity Risk Management; Corporate Financial Decisions; Capital Structure Optimization; Financing Strategies and Liquidity

References

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