Do Exchange Traded Funds Affect Corporate Cash Holdings?
45 Pages Posted: 5 Sep 2019 Last revised: 6 Sep 2019
Date Written: August 1, 2019
We examine the effects of corporate ownership by exchange traded funds (ETFs) on corporate cash holdings. Using a panel regression, we show that firms increase their cash holdings to hedge against higher anticipated stock risks induced by ETFs. To establish a causality interpretation, we use the exogenous changes to membership in the Russell index as an instrument for ETF ownership. We further show that shareholders place a higher value on additional cash held by firms with higher ETF ownership and these findings are more pronounced in financially constrained firms and good governance firms. Overall, our results suggest that firms hold more precautionary cash to mitigate future funding needs due to higher anticipated risks.
Keywords: exchange traded funds (ETF), corporate cash holdings
JEL Classification: G23, G32
Suggested Citation: Suggested Citation