The effect of stock liquidity on cash holdings: The Repurchase Motive

AuthorK. Nyborg, Z. Wang
JournalJournal of Financial Economics
Date15 Oct. 2021
CategoryAcademic Publications
Volume142(2)
Page numbers905–927

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.