Corporate Cash Holdings: Stock Liquidity and the Repurchase Motive

60 Pages Posted: 29 Jul 2019

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: June 2019

Abstract

We document that enhanced stock liquidity increases a firm's propensity to hold cash. Endogeneity is addressed using a difference-in-differences approach based on tick-size decimalization. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. We propose that firms hold cash also to buy back shares and higher stock liquidity strengthens this incentive. Tests are supportive. Endogeneity is controlled for using the introduction of repurchase safe harbor rules. We conclude that with respect to the effect of stock liquidity on cash holdings, the repurchase motive dominates the real investments motive.

Keywords: corporate cash holdings, Repurchases, Stock liquidity

JEL Classification: G10, G32, G35

Suggested Citation

Nyborg, Kjell G. and Wang, Zexi, Corporate Cash Holdings: Stock Liquidity and the Repurchase Motive (June 2019). CEPR Discussion Paper No. DP13791, Available at SSRN: https://ssrn.com/abstract=3428311

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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