Skip to main content

Research Repository

Advanced Search

Corporate liquidity and dividend policy under uncertainty

Koussis, Nicos; Martzoukos, Spiros H.; Trigeorgis, Lenos


Nicos Koussis

Spiros H. Martzoukos


We examine optimal liquidity (retained earnings) and dividend choice incorporating debt financing with risk of default and bankruptcy costs as well as growth options under revenue uncertainty. We revisit the conditions for dividend policy irrelevancy and the broader role of retained earnings and dividends. Retained earnings have a net positive impact on firm value in the presence of growth options, high external financing costs and low default risk. High levels of retained earnings enhance debt capacity but have a negative effect on equity value due to the likelihood of losing accumulated cash balances in case of default, unless offset by high external financing costs. Opposite directional effects of retained earnings on equity and debt create a U-shaped relation with firm value. The framework is extended to analyze management-shareholder conflicts, demonstrating that managers accumulate higher than optimal cash.


Koussis, N., Martzoukos, S. H., & Trigeorgis, L. (2017). Corporate liquidity and dividend policy under uncertainty. Journal of Banking and Finance, 81, 221-235.

Journal Article Type Article
Acceptance Date Nov 12, 2016
Online Publication Date Feb 4, 2017
Publication Date 2017-08
Deposit Date Feb 14, 2023
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Publisher Elsevier
Volume 81
Pages 221-235
Public URL