The Cash Conversion Cycle Spread
58 Pages Posted: 8 May 2017 Last revised: 5 Aug 2018
Date Written: August 1, 2018
The cash conversion cycle (CCC) refers to the time span between the outlay of cash for purchases to the receipt of cash from sales. It is a widely used metric to gauge the effectiveness of a firm’s management and intrinsic need for external financing. This paper shows that a zero-investment portfolio that buys stocks in the lowest CCC decile and shorts stocks in the highest CCC decile earns 5 to 7% alphas per year. The CCC effect is prevalent across industries and remains even for large capitalization stocks. The CCC effect is distinct from the known return predictors. The returns of high-CCC stocks are more sensitive to the health of the financial intermediaries than low-CCC stocks. This suggests that the CCC-based strategy cannot be explained by the financial intermediary leverage risk.
Keywords: Cash conversion cycle, intermediary asset pricing
JEL Classification: G02, G12
Suggested Citation: Suggested Citation