Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis
60 Pages Posted: 27 Jun 2013 Last revised: 3 Nov 2014
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Stock Liquidity and Corporate Cash Holdings: Feedback and the Cash as Ammunition Hypothesis
Stock Liquidity and Corporate Cash Holdings
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: Suggested Citation
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