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What is the real relationship between cash holdings and stock returns?

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  • Chuan ‘Chewie’ Ang, Tze
  • Lam, F.Y. Eric C.
  • Ma, Tai
  • Wang, Shujing
  • Wei, K.C. John

Abstract

The literature has provided mixed evidence on the relationship between cash holdings and average stock returns. We empirically verify that the relationship is positive and robust to the adjustment of risk, the construction of cash holdings portfolios, and the weighting scheme of portfolio returns. We further examine a battery of potential channels that can explain the positive relationship. We find that the cash holding effect can be subsumed by accruals-related anomalies and it mainly comes from stocks with low net operating assets. It is stronger among stocks with high limits to arbitrage. Overall, our results indicate that the cash holding effect does not present a new asset-pricing regularity, but that it is a manifestation of existing anomalies closely related to mispricing.

Suggested Citation

  • Chuan ‘Chewie’ Ang, Tze & Lam, F.Y. Eric C. & Ma, Tai & Wang, Shujing & Wei, K.C. John, 2019. "What is the real relationship between cash holdings and stock returns?," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 513-528.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:513-528
    DOI: 10.1016/j.iref.2019.09.003
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    More about this item

    Keywords

    Cash holdings; NOAs; Accruals; Limits to arbitrage; Mispricing; Investor sentiment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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