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Lookup NU author(s): Dr Minh Nguyen
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).
This study examines the relationships between excess corporate cash holding and equity option market liquidity over the period from Jan 3, 2005 to Aug 31, 2015. We show that the level of cash reserve in excess of what can be captured by firm characteristics significantly explains the liquidity of stock options. Trading volume and open interests of the options increase in companies with a higher magnitude of excess cash while the bid-ask spreads of stock options decline in excess cash. Our findings confirm the theoretical predictions by Gopalan et al. (2012) that excess cash improves market liquidity as it reduces adverse selection problems caused by the uncertainty in firm valuations. The relation between excess cash and option market liquidity becomes more pronounced for firms with a greater degree of informed trading or during periods of high volatility in financial markets. Our result shows that when the uncertainty about prospects of firms rises, excess cash becomes more valuable and affects option market liquidity.
Author(s): Deng M, Nguyen M
Publication type: Article
Publication status: Published
Journal: Journal of Financial Research
Year: 2024
Volume: 47
Issue: 2
Pages: 401-433
Print publication date: 01/06/2024
Online publication date: 20/12/2023
Acceptance date: 23/08/2023
Date deposited: 05/02/2024
ISSN (print): 0929-1199
ISSN (electronic): 1872-6313
Publisher: Elsevier BV
URL: https://doi.org/10.1111/jfir.12379
DOI: 10.1111/jfir.12379
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