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Excess Cash and Stock Returns

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  • Mikhail Simutin

Abstract

I document a positive relationship between corporate excess cash holdings and future stock returns. The difference in returns of portfolios of high and low excess cash firms amounts to 5% annually or 6% after standard three‐factor risk adjustment. Firms with more excess cash have higher market betas and earn lower returns during market downturns. High excess cash companies invest considerably more in the future than do their low cash peers, but do not experience stronger future profitability. On the whole, this evidence is consistent with the notion that excess cash holdings proxy for risky growth options.

Suggested Citation

  • Mikhail Simutin, 2010. "Excess Cash and Stock Returns," Financial Management, Financial Management Association International, vol. 39(3), pages 1197-1222, September.
    • Handle: RePEc:bla:finmgt:v:39:y:2010:i:3:p:1197-1222
    DOI: 10.1111/j.1755-053X.2010.01109.x
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    References listed on IDEAS

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