Authors: Kyriaki Kosmidou, Dimitrios Kousenidis, Anestis Ladas, Christos Negkakis

Title: Capital Controls’ Effects on Liquidity

Abstract

Capital controls in the form of restrictions in capital flows has long been proposed as a tool designed to cure destabilizing market movements (i.e. Tobin, 1978), although, it has not always proven to be a successful one (Edwards, 1999). The most recent examples of capital controls is the imposition of restrictions in capital flows in Cyprus in 2013 and in Greece in 2015 as a means of taming the escalating adverse effects of the financial crisis. This was the first time since the institution of the European Union, that capital controls were ever implemented to a member state and that a number of firms domiciled in the EU experienced the diverse effects of capital restrictions. In the present study, we attempt to evaluate the impact of capital controls on the financial position, and in particular on the liquidity position, of a sample of non-financial Cypriot and Greek firms during their implementation period. Our results indicate that the adverse effects of the crisis on the liquidity of firms are intensified during a period of capital controls. Moreover, our results show a negative relation between conditional conservatism and illiquidity, implying that conditionally conservative firms deal more effectively than other firms with harsh financial measures such as the capital controls.