Corporate Cash Holdings and the Cross-Sectional Variation in Asset Returns

50 Pages Posted: 22 Mar 2008

Date Written: June 1, 2007

Abstract

The level of cash holdings varies significantly across firms. As a low-returning asset, previous literature has theorized that holding excess cash should harm firm value. We find that this appears to be true amongst large firms. However, amongst small firms, we find that market returns rise with cash ratios (cash/assets or cash/market cap). These higher returns are not due to any known risk factors. Additionally they are accompanied by superior operating performance - higher growth in assets and growth in cash flow. Evidence supports the theory that the outperformance results from the easing of financial constraints upon these firms. The results are most robust for small, growth-oriented firms, who have the most difficulty accessing capital markets and could benefit the most from holding cash.

Keywords: cash, cash holdings

Suggested Citation

Shepherd, Shane D., Corporate Cash Holdings and the Cross-Sectional Variation in Asset Returns (June 1, 2007). Available at SSRN: https://ssrn.com/abstract=1084552 or http://dx.doi.org/10.2139/ssrn.1084552

Shane D. Shepherd (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States

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