Does stock liquidity matter for corporate cash holdings? Insights from a transition economy

Abstract

This research examined the impact of corporate stock liquidity on cash holdings in Vietnam, spanning 2010 to 2020. Our results reveal that higher stock liquidity engenders lower corporate cash holdings. This effect holds after using diverse measurements of stock liquidity and econometric techniques for endogeneity. Most strikingly, we leveraged an exogenous shock to stock liquidity resulting from a variety of Vietnamese legal adjustments in the fields of finance, accounting, and investment in 2015. Our primary results diverge from preceding findings in developed markets and support the conventional notion that corporate managers tend to reduce cash holdings when they forecast that there is a reduction in external financing costs due to increased stock liquidity. Deeper analyses disclose that the stock liquidity–cash holdings nexus is substantially dominated by firm attributes, namely the firm investment degrees and cash dividend paid levels. Notably, industrial manufacturing firms with high stock liquidity have been less precautionary in cash storage management from 2015 onwards. Furthermore, our findings reveal the modulating role of large foreign block-holders on the stock liquidity–corporate cash holdings relationship from 2015 onwards. In a nutshell, our paper offers valuable insights into the association of stock liquidity and corporate cash holdings in the unique context of a transition economy.