The impact of stock liquidity on cash holdings: an empirical investigation of listed firms in Malaysia

Kwan, Shiang Shen (2020) The impact of stock liquidity on cash holdings: an empirical investigation of listed firms in Malaysia. [Dissertation (University of Nottingham only)]

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Abstract

Over the past few decades, the tremendous growth in the level of cash held by firms around the world has raised academic interest among scholars to understand why firms are accumulating so much cash. While most research on the determinants of cash holdings has focused on firm-specific characteristics, there were only a few attempts that investigated how external factors like stock prices and returns would influence a firm’s cash holdings. Since an increase in stock liquidity, an indicator of how easily a stock can be sold or bought without affecting the stock price, will decrease the cost of capital, firms are expected to hold less cash as these firms can raise capital at a lower transaction cost with fewer constraints. However, there is a counter-argument which proposes that an increase in stock liquidity will incentivise firms to hold more cash to increase their capacity to reap the benefits of stock repurchase, implying that a firm’s financial policy is more inclined toward managing equity misvaluation than real investments.

In response to these polarised views, this study intends to examine the effect of stock liquidity on cash holdings among Malaysian firms. Stock prices and annual financial data of 132 listed firms from all sectors, except utilities and finance sectors, on the Main Market of Bursa Malaysia were collected for the period 2000 to 2018, which resulted in a total of 2,508 firm-year observations for this study. The pooled Ordinary Least Square (OLS) regression was adopted as the first estimator to analyse the relationship between stock liquidity and cash holdings. To control for any unobserved effects in the pooled OLS regression, the fixed effects model and the random effects model were also employed. The results of the analysis revealed that stock liquidity had a significant positive influence on cash holdings. Firms were also split into three panels according to firm size and it was found that the effect of stock liquidity on cash holdings was more pronounced in mid-size firms. The findings imply that firms have a higher propensity to hold cash to repurchase stocks when their stocks are liquid. Firms may do so to adjust their stock prices or to gain profit from undervalued equity.

Item Type: Dissertation (University of Nottingham only)
Keywords: investment, firm’s cash holdings, stock prices, Ordinary Least Square (OLS), Bursa Malaysia
Depositing User: Kwan, Shiang
Date Deposited: 03 Aug 2020 07:48
Last Modified: 03 Aug 2020 08:00
URI: http://eprints.nottingham.ac.uk/id/eprint/60251

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