Cash and Value
45 Pages Posted: 7 Jun 2017
Date Written: June 5, 2017
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: Suggested Citation