Recognizing that industry and capital market conditions may impede a firm's desire to achieve its targeted cash holding levels, we estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade‐off type behavior in cash holding levels. We estimate a partial adjustment model and find that firms rapidly correct any deviation from their targeted cash levels. A typical firm in our sample closes this gap within two years. Inconsistent with the agency view of excess cash holdings, we find that cash holding levels for firms with excess cash persists over time compared to those that have a deficit. We also find that smaller firms typically hold excess cash and are quicker to correct deviations than large firms consistent with the view that it is more costly for financially constrained firms to operate at sub‐optimal levels of liquid assets.

Purpose – Asset sales can have opposing effects on firm credit quality. On the one hand asset sales could signal increased credit risk resulting from distress or on the other hand they could improve internal liquidity and hence credit quality. Therefore the impact potential asset sales can have on credit quality is an empirical question and one that has previously not been examined in the literature. The paper aims to discuss these issues. Design/methodology/approach – Using credit ratings as a measure of firm credit quality, in ordered probit regressions, this study finds evidence consistent with the internal liquidity view of the asset sales-credit risk relationship. Findings – Results from ordered probit regressions of credit ratings show that the likelihood of higher credit ratings is increasing in industry-level turnover of real assets Originality/value – Credit-rating agencies often cite the impact of asset sales on firm credit quality as a motivation for their rating assignments. Distress-driven asset sales could reduce firm credit quality whereas other asset sales could result in increased internal firm liquidity and hence improve firm credit quality. This bi-directional expectation leaves the question of how asset sales affect credit quality to be answered empirically and has not been previously tested in the literature.

The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer‐run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors' expressed objectives. This article attempts to add to these findings by examining the case of a single well‐known investor, Carl Icahn, whose career as a shareholder activist now spans at least three decades. The authors report, first of all, that Icahn's targets have included companies from a remarkable variety of industries, and that his stated objectives have varied with the industries of the targets. Although more of Icahn's targets appear to have been overleveraged than underleveraged, a significant minority have had payouts ratios that were judged to be too low and more cash than they needed. In terms of Icahn's effect on other shareholders, the authors report a significant positive stock price reaction—on the order of 10%—to the announcement of Icahn's taking a position in the target firm. When examining the subsequent performance of the target firms, the authors found a very large difference between those firms that were either taken private or acquired (within 18 months)—over a third of the target companies—and those that remained independent. The authors report that although the acquired group achieved significant positive stock market returns, the firms that remained independent suffered very negative (‐60%) returns. Although Icahn's proposed changes could be responsible, as critics charge, for the performance of the latter group, the authors suggest that the success of many of these companies in fending off Icahn without enacting most of his proposed reforms is a more plausible explanation. At the same time, the authors report that Icahn was successful in achieving at least one of his stated objectives in well over half of the cases in which the target companies remained independent.

We examine the relation between excess returns and corporate trade credit policy. Robust results suggest a lower market value of receivables for firms with higher lagged receivables levels, consistent with diminishing returns from extending trade credit. Further findings indicate that the diminishing return to trade credit varies with industry affiliation, market share, and financial constraint. Our results emphasize the importance of actively monitoring trade credit levels.

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