Employee treatment and the choice of liquidity: lines of credit versus cash holdings

ABSTRACT

By examining the relation between the employee welfare index and the choice between lines of credit (LC) and cash holdings, we provide empirical findings consistent with monitored liquidity insurance, agency, and tax theories. There is a negative relation between the LC-to-cash ratio and the employee treatment index, which is more pronounced for firms with large intangible assets. Additionally, this negative relation is observed only in low agency firms, which is consistent with the prediction of agency theory of cash holdings. Firms increase LC to meet future investment opportunities rather than increasing cash holdings when their marginal tax rates are high.

KEYWORDS:

• Lines of credit
• cash holding
• stakeholder
• employee treatment
• marginal tax rate

JEL CLASSIFICATION:

• G30
• G32
• K22

Disclosure statement

The authors certify that they have no conflict of interest for the subject matter or materials discussed in the manuscript, which should be reported here.