Institutional Ownership and Firm Cash Holdings

Abstract

This study documents a robust and positive relation between ownership by short-term institutional investors and firm cash holdings. The effect of short-term institutional ownership on cash holdings is amplified for growth firms, which are subject to greater variability in future cash flows. Using path analysis, our evidence also indicates that short-term institutional ownership explains firm cash holdings via its effect on the firm’s stock price volatility and crash risk. Overall, our findings are consistent with the notion that frequent changes in ownership by short-term institutional investors leads to increased stock market uncertainty for firms and thus affects firms’ precautionary motives for cash, leading to higher level of cash holdings.