Corporate Cash Holdings: Stock Liquidity and the Repurchase Motive
60 Pages Posted: 29 Jul 2019
Date Written: June 2019
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: Suggested Citation