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


Nyborg, Kjell G; Wang, Zexi (2021). The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motiv. Journal of Financial Economics, 142(2):905-927.

Abstract

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.

Abstract

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.

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20 citations in Web of Science®
25 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Strategy and Management
Scope:Discipline-based scholarship (basic research)
Language:English
Date:November 2021
Deposited On:04 Nov 2021 15:27
Last Modified:26 Apr 2024 01:35
Publisher:Elsevier
ISSN:0304-405X
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jfineco.2021.05.027
Official URL:https://www.sciencedirect.com/science/article/pii/S0304405X21002099
Other Identification Number:merlin-id:19146
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