Financial Market Structure and Cash Holdings: A Laboratory of Dark Trading
83 Pages Posted: 14 Dec 2023 Last revised: 27 Jan 2025
Date Written: November 25, 2023
Abstract
Does financial market structure influence firms’ cash saving decisions? 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
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