The Impact of Financial Constraints on the Relationship between Excess Cash with Trading Continuity and Stock Liquidity

Abstract

Objective: Since investors are usually risk averse, liquidity risk can affect the returns on their investments. Thus, liquidity is significant for investors. Given the management entrenchment hypothesis and the investment opportunities hypothesis, it is ambiguous to determine the type of effect of surplus cash on trading continuity and stock liquidity risk. Consequently, to overcome this ambiguity, it is necessary to empirically test these relationships. In this regard, the purpose of the present study is to investigate the effect of financial constraint on the relationship between cash surplus and liquidity risk and the continuation of stock trading of listed companies in the Tehran Stock Exchange during the period 2011- 2020. Methods: The statistical population of this research is the companies listed on the Tehran Stock Exchangethat for this purpose, 147 companies were selected through systematic elimination method and multivariate regression and Panel data method were used to test the hypotheses. Results: The results and findings of the study confirm the negative effect of surplus cash on liquidity risk and trading continuity. Other findings of the study Showed that financial constraints decline the relationship between excess cash and stock liquidity and transaction continuity. Conclusion: The results of the study indicate that the excess cash leads to an increase in agency and decrease in liquidity and continuity of transactions. This result is weaker in companies with financial constraints, because these companies can attract more investors and boost their stock trading through surplus cash. In other words, the existence of financial constraints leads to the dominance of the investment opportunity hypothesis over the management fortification hypothesis.

Keywords

• trading continuity
• financial constraint
• stock liquidity
• excess cash holding