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

Nyborg, Kjell and Wang, Jesse (2021) The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive. Journal of Financial Economics, 142 (2). pp. 905-927. ISSN 0304-405X

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Enhanced stock liquidity increases a firm’s propensity to hold cash. This is surprising given the view that improved stock liquidity reduces financial constraints. We propose that firms have a repurchase motive for holding cash. Higher stock liquidity strengthens this incentive. Consistent with this, firms with more liquid stock increase cash holdings relatively more when restrictions to repurchases are eased. The effect of stock liquidity on cash holdings is not influenced by access to credit markets. Our findings suggest that the repurchase motive dominates the real investments motive with respect to the effect of stock liquidity on cash holdings.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial Economics
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This is the author’s version of a work that was accepted for publication in Journal of Financial Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial, 142, 2, 2021 DOI: 10.1016/j.jfineco.2021.05.027
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15 Dec 2020 16:45
Last Modified:
03 Jun 2023 00:33