What is the Real Relationship between Cash Holdings and Stock Returns?

HKIMR Working Paper No.12/2019

45 Pages Posted: 18 Oct 2019

See all articles by Tze Chuan 'Chewie' Ang

Tze Chuan 'Chewie' Ang

Deakin University - Department of Finance; Financial Research Network (FIRN)

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Tai Ma

National Sun Yat-sen University

Shujing Wang

Tongji University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: October 9, 2019

Abstract

The literature has provided mixed evidence on the relationship between cash holdings and average stock returns. We empirically verify that the relationship is positive and robust to the adjustment of risk, the construction of cash holdings portfolios, and the weighting scheme of portfolio returns. We further examine a battery of potential channels that can explain the positive relationship. We find that the cash holding effect can be subsumed by accruals-related anomalies and it mainly comes from stocks with low net operating assets. It is stronger among stocks with high limits to arbitrage. Overall, our results indicate that the cash holding effect does not present a new asset-pricing regularity, but that it is a manifestation of existing anomalies closely related to mispricing.

Keywords: Cash holdings; NOAs; Accruals; Limits to arbitrage; Mispricing; Investor sentiment

JEL Classification: G12, G14, G32

Suggested Citation

Ang, Tze Chuan and Lam, Full Yet Eric Campbell and Ma, Tai and Wang, Shujing and Wei, Kuo-Chiang (John), What is the Real Relationship between Cash Holdings and Stock Returns? (October 9, 2019). HKIMR Working Paper No.12/2019. Available at SSRN: https://ssrn.com/abstract=3466553 or http://dx.doi.org/10.2139/ssrn.3466553

Tze Chuan Ang (Contact Author)

Deakin University - Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia
+61 3 9244 6626 (Phone)

HOME PAGE: http://www.deakin.edu.au/profiles/tze-ang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia,
Brisbane, Queensland 4071
Australia

HOME PAGE: http://www.firn.org.au

Full Yet Eric Campbell Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

Tai Ma

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan
886-7-525-2000 ext. 4810 (Phone)
886-7-525-4899 (Fax)

HOME PAGE: http://www.finance.nsysu.edu.tw/teachers/matai/e-index.htm

Shujing Wang

Tongji University ( email )

Shanghai
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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