Financial Market Structure and Cash Holdings: A Laboratory of Dark Trading

Abstract

Does financial market structure influence for firms’ cash holdings? We find that firms hold less cash when more of their shares are traded on alternative trading platforms, i.e., “dark” venues. We exploit the randomized variation in dark trading generated by the trade‑at rule of the Tick Size Pilot Program to establish a causal relation. Dark trading is also associated with a higher value of cash. Enhanced price efficiency due to dark trading facilitates the relaxation of financial constraints and the improvement of governance, mechanisms through which dark trading lowers the precautionary demand for cash holdings. 

Keywords: Dark trading, Cash holdings, Finance constraints, Corporate Governance, Market feedback

JEL Classification: G12, G14, G32, M40, M41