How Does Stock Liquidity Affect Corporate Cash Holdings in Japan?

This study aims to examine the positive relationship between stock liquidity and corporate cash holdings in the context of Japan and offer a novel explanation. Our explanation is based on the “dark side” of stock liquidity, according to which liquidity can aggravate corporate financial constraints by increasing the stock price crash risk. If a manager expects liquidity to increase the cost of external capital, s/he will have a precautionary motive to hold cash. We test whether stock liquidity positively affects corporate cash holdings in Japan. Furthermore, we isolate our hypothesis from other possible explanations by assessing whether the positive liquidity cash relationship is more pronounced in firms with overvaluation or with private bad news