Aggregate Funding Conditions, Cash, and the Cross-Section of Stock Returns
59 Pages Posted: 26 Jun 2015 Last revised: 3 Aug 2017
Date Written: August 02, 2017
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.
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