Working Paper: CEPR ID: DP13791
Authors: Kjell G. Nyborg; Zexi Wang
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
JEL Codes: G32; G35; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| enhanced stock liquidity (G10) | increased firm's propensity to hold cash (D25) |
| higher stock liquidity (G10) | increased cash holdings when constraints on repurchase activities are eased (G34) |
| firms with high market timing potential and liquid stocks (G14) | hold more cash in anticipation of future buybacks (G34) |