Do Exchange Traded Funds Affect Corporate Cash Holdings?

66 Pages Posted: 5 Sep 2019 Last revised: 28 Jan 2021

See all articles by Beiqi Lin

Beiqi Lin

University of Queensland - Business School

Kelvin Jui Keng Tan

University of Queensland - Business School; Financial Research Network (FIRN)

Lei Zhang

City University of Hong Kong (CityU)

Date Written: November 1, 2020

Abstract

We examine the effects of equity ownership by exchange traded funds (ETFs) on corporate cash holdings. We find that firms increase their cash holdings in response to higher anticipated risks generated by ETFs. To establish a causal interpretation, we use the Russell 1000/2000 index reconstitution as an instrument for ETF ownership. We further show that shareholders place a higher value on the additional cash held by firms with higher ETF ownership. These findings are more pronounced among financially constrained firms. Overall, our results suggest that firms hold more precautionary cash to mitigate future funding needs due to higher ETF-induced risks.

Keywords: Exchange traded funds, Cash holdings, ETF ownership, Financial constraints

JEL Classification: G23, G32

Suggested Citation

Lin, Beiqi and Tan, Kelvin Jui Keng and Zhang, Lei, Do Exchange Traded Funds Affect Corporate Cash Holdings? (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3443955 or http://dx.doi.org/10.2139/ssrn.3443955

Beiqi Lin (Contact Author)

University of Queensland - Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Kelvin Jui Keng Tan

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Lei Zhang

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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