Impact of Cash Holdings on Investment Value
47 Pages Posted: 2 Mar 2006 Last revised: 1 Jun 2010
Date Written: February 1, 2006
Abstract
This paper has been revised into one subsequent SSRN working paper and another paper in progress.
Popular press has argued that firms holding cash should be regarded highly by investors because firms will access good prospects. This view contradicts with the Jensen (1986) free cash flow proposition. This study examines the investor viewpoint by investigating investment returns of portfolios created according to trading strategies based on cash holdings and predictions of cash holdings. Data is organized into quintiles categorized by PE ratios and then each quintile is divided into high and low cash-holding portfolios. Evidence is found in favor and against popular press contentions depending on the definition of cash holding.
JEL Classification: G12, M41, D82, G31
Suggested Citation: Suggested Citation