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The effect of stock liquidity on cash holdings: The repurchase motiv


Nyborg, Kjell G; Wang, Zexi (2019). The effect of stock liquidity on cash holdings: The repurchase motiv. Swiss Finance Institute Research Paper 19-30, University of Zurich.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:3 June 2019
Deposited On:28 Aug 2023 13:01
Last Modified:06 Mar 2024 14:33
Series Name:Swiss Finance Institute Research Paper
Number of Pages:71
OA Status:Closed
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.3398154
Other Identification Number:merlin-id:20153, 3398154
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