What is the Real Relation between Cash Holdings and Stock Returns?

39 Pages Posted: 16 Mar 2013 Last revised: 24 Sep 2016

See all articles by FY Eric Lam

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Tai Ma

National Sun Yat-sen University

Shujing Wang

Tongji University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: Sep 1, 2016

Abstract

The literature has proposed a positive relation and a negative relation between cash holdings and future stock returns. We empirically verify that the relation is robustly positive. We examine a battery of applicable channels from the literature and find the return predictability to be a surrogate for either the accruals and profitability effects or the net operating assets effect. We further find that the relation depends on limits to arbitrage and hence the mispricing channel seems to be more appropriate. After all, the relation does not present a new asset pricing regularity or anomaly.

Keywords: Cash holdings; Accruals; Profitability; Net operating assets; Limits to arbitrage

JEL Classification: G12, G14, G32

Suggested Citation

Lam, Full Yet Eric Campbell and Ma, Tai and Wang, Shujing and Wei, Kuo-Chiang (John), What is the Real Relation between Cash Holdings and Stock Returns? (Sep 1, 2016). 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2234232 or http://dx.doi.org/10.2139/ssrn.2234232

Full Yet Eric Campbell Lam (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

Tai Ma

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan
886-7-525-2000 ext. 4810 (Phone)
886-7-525-4899 (Fax)

HOME PAGE: http://www.finance.nsysu.edu.tw/teachers/matai/e-index.htm

Shujing Wang

Tongji University ( email )

Shanghai
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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