The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive

Wang, Jesse and Nyborg, Kjell (2020) The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive. Journal of Financial Economics. ISSN 0304-405X (In Press)

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Abstract

We show that enhanced stock liquidity increases a firm’s propensity to hold cash using tick-size decimalization for identification. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. As an explanation, we propose that there is a repurchase motive for holding cash. Higher stock liquidity strengthens this incentive. Consistent with this perspective, we show that firms with more liquid stock increase cash holdings relatively more around the introduction of safe harbor rules for repurchases. With respect to the effect of stock liquidity on cash holdings, therefore, our findings suggest that the repurchase motive dominates the real investments motive. We also show that this effect is not influenced by a firm’s relative ability to access to credit markets.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial Economics
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1408
Subjects:
ID Code:
150004
Deposited By:
Deposited On:
15 Dec 2020 16:45
Refereed?:
Yes
Published?:
In Press
Last Modified:
08 Jan 2021 06:57