Download This PaperFree Cash Flows and Price Momentum
Journal of Accounting, Auditing and Finance, forthcoming
40 Pages Posted: 24 Jul 2018 Last revised: 22 Jun 2022
Date Written: November 16, 2019
Abstract
This study investigates the role of free cash flows and (cross-sectional and time-series) price momentum in predicting future stock returns. Past returns and free cash flows each positively predict future stock returns after controlling for the other, suggesting that cash flows and momentum both contain valuable and distinctive information about future stock returns. A strategy of buying past winners with high free cash flows and shorting past losers with low free cash flows significantly outperforms the traditional momentum trading strategy. The enhanced performance is not sensitive to investor sentiment, time variations, or transaction costs. Further analysis shows that the incremental cash flow effects are largely attributable to net distributions to equity/debt holders. Overall, our findings shed light on the role of corporate fundamentals in technical trading strategies.
Keywords: Free cash flows, Cross-sectional momentum, Time-series momentum, Fundamental analysis, Technical trading
JEL Classification: M41, G12, G14
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