Excess cash, trading continuity, and liquidity risk

Abstract

This study investigates the impact of excess cash on the liquidity risk faced by investors and their required liquidity premium. It shows that excess cash improves trading continuity and reduces both liquidity risk and the cost of equity capital. These findings are consistent with the view that firms with excess cash attract more traders even when market liquidity dries up. The increase in investors' trading propensity reduces stock price exposure to shocks to market liquidity and the liquidity premium required by investors. We also examine the impact of excess cash on firm value. We show that while the direct effect of excess cash on firm value is negative, its indirect effect through liquidity is significantly positive, indicating that investors are less likely to sanction (or even reward) illiquid firms for holding excess cash. Further analysis suggests that the liquidity benefits of excess cash are greater for financially constrained firms and firms with high growth opportunities. Our results are robust over time, after addressing endogeneity concerns, and to alternative estimation methods and alternative measures of liquidity.

Efeito da estrutura do conselho de administração na retenção de caixa das companhias abertas

“…According to Al-Najjar and Clark (2017), companies keep cash to meet costs related to ongoing activities, as a way to prevent potential unforeseen events and uncertainties and not to waste advantageous investment opportunities, in order to avoid expensive external financing or forced liquidation of assets, and therefore the cashier reflects financial security to the company. Furthermore, Huang and Mazouz (2018) claim that excess cash reduces the cost of equity and the liquidity risk of market, and improves the continuity of trades, since this excess allows the financing of profitable investment opportunities and the survival of the company to economic crises and therefore can attract new traders.…”

Hisse Senedi Likiditesi ile İşletmelerin Nakit Varlıkları Arasındaki Nedensellik İlişkisi

“…They find that firms with higher levels of cash holdings have lower stock liquidity risk because firms which hold excess cash holdings are attractive for investors. Accordingly, Huang & Mazouz (2018) find that their results support the investment opportunities hypothesis, which suggests excess cash holdings support growth and investment opportunities for firms. Thus cash holdings attract investors and in turn, increase stock liquidity.…”

“…Their results show that the association of stock liquidity and corporate liquidity may change depending on ownership concentration. Huang & Mazouz (2018) investigate how excess cash affects stock liquidity using a large sample of the US common stocks. They find that firms with higher levels of cash holdings have lower stock liquidity risk because firms which hold excess cash holdings are attractive for investors.…”

Brand Equity and Firm Sustainable Performance: The Mediating Role of Analysts’ Recommendations

“…To address the potential endogeneity problem in the estimation model, we took several measures. First, in order to alleviate the potential reverse causality, we lagged our independent variable, moderator and all control variables for one period [67,68], i.e., the data on independent variable (i.e., brand equity), moderator (i.e., industrial competition) and controls variables were from 2004 to 2015, while data on mediators (i.e., analysts' recommendations) and dependent variable (i.e., firm sustainable performance) were from 2005 to 2016. Second, we employed a hackman two-stage model [69] to account for the sample selection bias.…”