Stock Liquidity and Corporate Cash Holdings

49 Pages Posted: 9 Jul 2013

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: July 2013

Abstract

The paper contributes to the literature on corporate cash holdings by showing that there is a financial markets channel that affects corporations’ cash holdings. Leaning on the literature on stock price feedback to firm fundamentals, we advance the hypothesis that firms with more liquid stocks hold more cash, ceteris paribus, as ammunition to defend against negative cascades or stimulate positive ones. This contrasts with an alternative view that firms with more liquid stocks are less financially constrained and therefore hold relatively less cash. The evidence favors the cascade/cash as ammunition hypothesis, also with respect to its predictions regarding growth opportunities and cash holdings. As a robustness check, we use the introduction of tick size decimalization in 2001 as a natural experiment where liquidity was exogenously shocked. We also find evidence of two-way causality; a higher level of stock liquidity leads to more cash holdings, and vice versa.

Keywords: cascades, cash holdings, feedback, information, Stock liquidity

JEL Classification: G1, G3

Suggested Citation

Nyborg, Kjell G. and Wang, Zexi, Stock Liquidity and Corporate Cash Holdings (July 2013). CEPR Discussion Paper No. DP9535, Available at SSRN: https://ssrn.com/abstract=2291336

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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