Excess cash, trading continuity, and liquidity risk

Winifred Huang, Khelifa Mazouz

Research output: Contribution to journalArticle

  • 1 Citations

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.
LanguageEnglish
Pages275-291
Number of pages17
JournalJournal of Corporate Finance
Volume48
Early online date16 Nov 2017
DOIs
StatusPublished - 1 Feb 2018

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Cash
Continuity
Liquidity risk
Investors
Liquidity
Market liquidity
Firm value
Liquidity premium
Reward
Propensity
Sanctions
Direct effect
Stock prices
Indirect effects
Growth opportunities
Endogeneity
Cost of equity capital
Traders

Cite this

Excess cash, trading continuity, and liquidity risk. / Huang, Winifred; Mazouz, Khelifa.

In: Journal of Corporate Finance, Vol. 48, 01.02.2018, p. 275-291.

Research output: Contribution to journalArticle

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