The bidirectional causal relationship between cash holding and bid-ask spread: evidence from panel ARDL model

Abstract

Purpose

This paper tests the causal relationship between bid ask spread and cash holding in the short and long run. It uses different proxy of corporate cash holding and test three proxies of a bid-ask spread. It also provides comprehensive and robust evidence for the causal relationship between cash holding and stock liquidity in an emergent market.

Design/methodology/approach

This study is based on a sample covering all financial and industrial firms in Tunisia’s stock market from 2008 to 2020. It uses a panel ARDL data approach to test the bi-directional relationship between cash holding and stock liquidity. This paper conducts rigorous statistical analysis of the collected data to test the hypothesized relationship between cash holding and bid-ask spread. This can involve running regression models, performing statistical tests, and analyzing the significance of the estimated coefficients.

Findings

Overall, paper’s findings provide empirical evidence supporting the bidirectional causal relationship between cash holding and bid-ask spread. The results highlight the importance of cash holding in determining stock liquidity and suggest that firms with higher cash holdings may face liquidity challenges. These findings have implications for corporate governance and can guide firms and regulators in improving stock liquidity and designing appropriate policies and recommendations.

Practical implications

Overall, the practical implications of this paper suggest that firms can enhance their stock liquidity by improving governance mechanisms and optimizing cash management strategies. Regulators can play a crucial role in creating a conducive market environment, and investors can take into account the relationship between cash holding and stock liquidity when making investment decisions.

Originality/value

We present empirical evidence of the relation causality between stock liquidity and cash holding. Our research is the first to test the bidirectional relationship between bid ask spread and cash holding in the short and long run. Overall, the originality of this paper lies in its exploration of the causal relationship between cash holding and bid-ask spread, the use of multiple proxies for stock liquidity, the examination of an emerging market context, the comparative analysis across sectors, and the practical implications for firms and regulators. These contributions add to the existing body of knowledge and provide new insights into the dynamics of cash holding and stock liquidity.

Citation

Daadaa, W. and Daadaa, M.A. (2024), "The bidirectional causal relationship between cash holding and bid-ask spread: evidence from panel ARDL model", African Journal of Economic and Management Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/AJEMS-03-2024-0205