The Effect of Stock Liquidity on Corporate Cash Holdings: The Real Investment Motive

International Review of Finance, Vol. 22, Issue 3, pp. 580-596, 2022

20 Pages Posted: 14 Jul 2020 Last revised: 21 Aug 2023

See all articles by Hyun Joong Im

Hyun Joong Im

The University of Seoul

Barry R. Oliver

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

Heungju Park

Sungkyunkwan University - SKK Business School

Date Written: February 1, 2022

Abstract

This study examines the relationship between stock liquidity and corporate cash holdings and explores a new economic mechanism driving this relationship. Using a regression discontinuity design (RDD) approach based on the annual reconstitution of the Russell 1000/2000 indices, we find that stock liquidity has a positive causal effect on corporate cash holdings. This effect is more pronounced for firms with more investment opportunities. These results suggest that enhanced stock liquidity increases corporate cash holdings by expanding the set of investment opportunities. Our evidence supports the real investment motive over the repurchase motive.

Keywords: stock liquidity, cash holdings, investment opportunities, external financing costs

JEL Classification: G31, G32, G12

Suggested Citation

Im, Hyun Joong and Oliver, Barry Ross and Park, Heungju, The Effect of Stock Liquidity on Corporate Cash Holdings: The Real Investment Motive (February 1, 2022). International Review of Finance, Vol. 22, Issue 3, pp. 580-596, 2022, Available at SSRN: https://ssrn.com/abstract=3610464 or http://dx.doi.org/10.2139/ssrn.3610464

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

163 Seoulsiripdae-ro
Dongdaemun-gu
Seoul, 02504
Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

Barry Ross Oliver

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Heungju Park

Sungkyunkwan University - SKK Business School ( email )

Seoul
Korea, Republic of (South Korea)

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