Aggregate Funding Conditions, Cash, and the Cross-Section of Stock Returns

59 Pages Posted: 26 Jun 2015 Last revised: 3 Aug 2017

Michael J. Cooper

University of Utah - David Eccles School of Business

Tyler Jensen

Iowa State University - Department of Accounting and Finance

Date Written: August 02, 2017

Abstract

Prior literature has documented a significant positive association between firm cash holdings and future returns (Simutin (2010) and Palazzo (2012)). We extend this literature by introducing time-varying aggregate financial constraints and showing that the link between cash and returns is only evident in constrained funding environments. In unconstrained periods, there is little to no association (and sometimes a negative association) between cash and future returns. The results are consistent with investors underappreciating the investment opportunities afforded to high cash firms in periods of constrained financing.

Suggested Citation

Cooper, Michael J. and Jensen, Tyler, Aggregate Funding Conditions, Cash, and the Cross-Section of Stock Returns (August 02, 2017). Available at SSRN: https://ssrn.com/abstract=2622676 or http://dx.doi.org/10.2139/ssrn.2622676

Michael J. Cooper (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Tyler Jensen

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

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