The effect of stock liquidity on corporate cash holdings: The real investment motive

Hyun Joong Im, Barry Oliver, Heungju Park

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

This study examines the relationship between stock liquidity and corporate cash holdings and explores a new economic mechanism driving this relationship. Using a regression discontinuity design approach based on the annual reconstitution of the Russell 1000/2000 indices, we find that stock liquidity has a positive causal effect on corporate cash holdings. This effect is more pronounced for firms with more investment opportunities. These results suggest that enhanced stock liquidity increases corporate cash holdings by expanding the set of investment opportunities. Our evidence supports the real investment motive over the repurchase motive.

Original languageEnglish
Pages (from-to)580-596
Number of pages17
JournalInternational Review of Finance
Volume22
Issue number3
DOIs
StatePublished - Sep 2022

Keywords

  • cash holdings
  • external financing costs
  • investment opportunities
  • stock liquidity

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