The Cash Cycle Surprise and Future Stock Returns

Posted: 4 Jul 2023

See all articles by Chao Jiang

Chao Jiang

University of South Carolina - Department of Finance

Date Written: June 27, 2023

Abstract

The cash cycle measures the time it takes for a company to complete its entire business process from inventory payment to cash collection. We introduce a measure of the cash cycle surprise (CCS) and show that it negatively predicts future stock returns. This predictive relationship is robust to controlling for the cash cycle and other determinants of stock returns. The CCS also forecasts earnings surprises and analyst forecast errors. Furthermore, the results are more pronounced for stocks with greater limits to arbitrage and following periods of elevated market sentiment. The results are best explained by investor underreaction.

Suggested Citation

Jiang, Chao, The Cash Cycle Surprise and Future Stock Returns (June 27, 2023). Available at SSRN: https://ssrn.com/abstract=4493466

Chao Jiang (Contact Author)

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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