Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis

60 Pages Posted: 27 Jun 2013 Last revised: 3 Nov 2014

See all articles by Kjell G. Nyborg

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Zexi Wang

Lancaster University

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2014

Abstract

We advance the feedback/cash as ammunition hypothesis, namely that firms hold cash to address feedback from stock prices to cash ows and growth opportunities. Firms with more liquid stocks are expected to hold more cash, the opposite of the prediction from a standard information asymmetry perspective on stock liquidity. The effect should be amplifed by growth opportunities. These and other predictions are supported in the data. We use the introduction of tick-size decimalization as a natural experiment where liquidity is exogenously shocked. The evidence also suggests that cash holdings and stock liquidity are mutually reinforcing. As predicted by theory, stock liquidity is affected by factors relating to information asymmetry, inventory risks, and transaction costs.

Keywords: Corporate cash holdings, Stock liquidity, Feedback

JEL Classification: G12, G32

Suggested Citation

Nyborg, Kjell G. and Wang, Zexi, Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis (October 23, 2014). Swiss Finance Institute Research Paper No. 13-36, Available at SSRN: https://ssrn.com/abstract=2285535 or http://dx.doi.org/10.2139/ssrn.2285535

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom

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