The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive

Kjell Nyborg and Zexi Wang
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Zexi Wang: University of Bern

No 19-30, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We show that enhanced stock liquidity increases a firm’s propensity to hold cash using tick-size decimalization for identification. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. As an explanation, we propose that there is a repurchase motive for holding cash. Higher stock liquidity strengthens this incentive. Consistent with this perspective, we show that firms with more liquid stock increase cash holdings relatively more around the introduction of safe harbor rules for repurchases. With respect to the effect of stock liquidity on cash holdings, therefore, our findings suggest that the repurchase motive dominates the real investments motive. We also show that this effect is not influenced by a firm’s relative ability to access to credit markets.

Keywords: Corporate cash holdings; Stock liquidity; Repurchases; Credit lines (search for similar items in EconPapers)
JEL-codes: G10 G32 G35 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2019-06, Revised 2020-12
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The effect of stock liquidity on cash holdings: The repurchase motive (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1930

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