The Productivity of Corporate Cash Holdings and the Cross-Section of Expected Stock Returns

Abstract:     
Assuming that firms hold cash to generate rents (NPVs plus growth options), we define the "productivity of cash" as the rents that the firm generates per dollar of cash holdings. We investigate the empirical relationship between the productivity of cash and expected stock returns, and find that the productivity of cash is a highly significant and negative predictor of stock returns. We rationalize this finding as an implication of the inverse relation between the productivity of cash measure and the firm's financial risk. Our evidence suggests that the productivity of cash is a (new) and economically rich factor explaining the cross-section of expected stock returns -- one that subsumes details of the firm's financial risk, discount rates, and the composition of the assets generating cash flows.

Number of Pages in PDF File: 41

Keywords: cash, stock prices, expected returns, productivity

working papers series