Excess Cash and Stock Returns

Financial Management, 2010, 39 (3), p. 1197-1222

49 Pages Posted: 15 Jan 2009 Last revised: 31 May 2013

See all articles by Mikhail Simutin

Mikhail Simutin

University of Toronto - Rotman School of Management

Date Written: March 23, 2010

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.

Keywords: Cash holdings, stock returns, investment, growth options

JEL Classification: G12

Suggested Citation

Simutin, Mikhail, Excess Cash and Stock Returns (March 23, 2010). Financial Management, 2010, 39 (3), p. 1197-1222, Available at SSRN: https://ssrn.com/abstract=1327575

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

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