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

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 (RDD) 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. JEL classification: G31, G32, G12

• Publication year

  2022

• Venue

  International Review of Finance

• Publication date

  2022-03-09

• Fields of study

  Not labeled

• Identifiers
  DOI 10.1111/irfi.12377
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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