The effect of stock liquidity on cash holdings: The repurchase motive

Kjell Nyborg and Zexi Wang

Journal of Financial Economics, 2021, vol. 142, issue 2, 905-927

Abstract: Enhanced stock liquidity increases a firm’s propensity to hold cash. This is surprising given the view that improved stock liquidity reduces financial constraints. We propose that firms have a repurchase motive for holding cash. Higher stock liquidity strengthens this incentive. Consistent with this, firms with more liquid stock increase cash holdings relatively more when restrictions to repurchases are eased. The effect of stock liquidity on cash holdings is not influenced by access to credit markets. Our findings suggest that the repurchase motive dominates the real investments motive with respect to the effect of stock liquidity on cash holdings.

Keywords: Corporate cash holdings; Stock liquidity; Repurchases; Credit lines (search for similar items in EconPapers)
JEL-codes: G12 G32 G35 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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Working Paper: The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:905-927

DOI: 10.1016/j.jfineco.2021.05.027

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