Corporate cash holdings: Stock liquidity and the repurchase motive

Kjell Nyborg and Zexi Wang

No 13791, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We document that enhanced stock liquidity increases a firm's propensity to hold cash. Endogeneity is addressed using a difference-in-differences approach based on tick-size decimalization. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. We propose that firms hold cash also to buy back shares and higher stock liquidity strengthens this incentive. Tests are supportive. Endogeneity is controlled for using the introduction of repurchase safe harbor rules. We conclude that with respect to the effect of stock liquidity on cash holdings, the repurchase motive dominates the real investments motive.

Keywords: Corporate cash holdings; Stock liquidity; Repurchases (search for similar items in EconPapers)
JEL-codes: G10 G32 G35 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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