Stock liquidity and corporate cash holdings

We advance the feedback/cash as ammunition hypothesis, namely that firms hold cash to address feedback from stock prices to cash ows and growth opportunities. Firms with more liquid stocks are expected to hold more cash, the opposite of the prediction from a standard information asymmetry perspective on stock liquidity. The effect should be amplifed by growth opportunities. These and other predictions are supported in the data. We use the introduction of tick-size decimalization as a natural experiment where liquidity is exogenously shocked. The evidence also suggests that cash holdings and stock liquidity are mutually reinforcing. As predicted by theory, stock liquidity is affected by factors relating to information asymmetry, inventory risks, and transaction costs