Stock liquidity, cash flow sensitivity and the value of cash

Helen Spiropoulos and Ruoyun Zhao

International Review of Economics & Finance, 2023, vol. 88, issue C, 1565-1581

Abstract: Using a sample of U.S. public firms from 1990 to 2017, we find that firms with higher stock liquidity are associated with lower cash flow sensitivity of cash. An analysis of the market value of cash shows that each additional dollar of cash and investment in non-cash assets is worth significantly more in firms with high stock liquidity than in firms with low stock liquidity. Further analysis indicates that firms with high stock liquidity enjoy higher investment efficiency and invest more in capital expenditure and R&D. The reduction in cash flow sensitivity through improved stock liquidity is more pronounced when firms demonstrate lower financial constraint, information asymmetry and risk, and stronger corporate governance (i.e., fewer agency problems). Overall, these results suggest that stock liquidity reduces information asymmetry and the agency costs of free cash flow, thus contributing to value enhancing investments which improves company valuation.

Keywords: Stock liquidity; Cash flow sensitivity; Value of cash; Agency theory (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:1565-1581

DOI: 10.1016/j.iref.2023.07.035

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