Discussion Paper Details

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Title: Corporate cash holdings: Stock liquidity and the repurchase motive

Author(s): Kjell G Nyborg and Wang

Publication Date: June 2019

Keyword(s): corporate cash holdings, Repurchases and Stock liquidity

Programme Area(s): Financial Economics

Abstract: We document that enhanced stock liquidity increases a firm's propensity to hold cash. Endogeneity is addressed using a difference-in-differences approach based on tick-size decimalization. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. We propose that firms hold cash also to buy back shares and higher stock liquidity strengthens this incentive. Tests are supportive. Endogeneity is controlled for using the introduction of repurchase safe harbor rules. We conclude that with respect to the effect of stock liquidity on cash holdings, the repurchase motive dominates the real investments motive.

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Bibliographic Reference

Nyborg, K and Wang, . 2019. 'Corporate cash holdings: Stock liquidity and the repurchase motive'. London, Centre for Economic Policy Research.