This pre-registered report outlines a comprehensive plan for a paper aimed at examining the positive relationship between stock liquidity and corporate cash holdings within the context of Japan. This study aims to offer a novel explanation. Our explanation is rooted in the “dark side” of stock liquidity, suggesting that liquidity could exacerbate corporate financial constraints by increasing the stock price crash risk. If managers expect liquidity to cause the surge of the cost of external capital, they will have a precautionary motive to retain cash. We plan to examine whether stock liquidity positively affects corporate cash holdings in Japan. Furthermore, we plan to isolate our hypothesis from other possible explanations by assessing whether the positive liquidity-cash relationship is more pronounced in firms experiencing overvaluation.
In this pre-registration study, we revisit the liquidity–cash puzzle: the positive relationship between stock liquidity and corporate cash holdings. To achieve this, we implement the empirical analysis outlined in a pre-registered report (Fujitani et al., 2024). We propose and provide evidence for a new precautionary motive that explains why firms with higher stock liquidity accumulate more cash in Japan. We argue that managers hold cash as a precautionary buffer against stock price crash risks intensified by high stock liquidity. Consistent with this hypothesis, we find that the positive relationship between stock liquidity and cash holdings is more pronounced among firms that are overvalued or financially constrained, that is, those with higher ex-ante crash risk.