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Cash and Value

45 Pages Posted: 7 Jun 2017  

Mamdouh Medhat

Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2017

Abstract

In a q-theoretic model featuring financing constraints, higher expected returns accrue to firms with lower valuations or higher cash, but valuations and cash are positively related. As a result, purging the relation between returns and valuations of cash results in a stronger value effect while purging the relation between returns and cash of valuations results in a stronger cash effect. The data confirm these predictions. In particular, controlling for cash increases the power of book-to-market predicting the cross section of returns, improves the performance of value strategies, implies a non-redundant role for the value factor alongside profitability and investment factors, and helps explain anomalies.

Keywords: Value premium, cash holdings, q-theory, factor models

JEL Classification: G12, G31, G35

Suggested Citation

Medhat, Mamdouh, Cash and Value (June 5, 2017). Available at SSRN: https://ssrn.com/abstract=2981340 or http://dx.doi.org/10.2139/ssrn.2981340

Mamdouh Medhat (Contact Author)

Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/experts/M.Medhat

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