Two–pass cross–sectional regressions under potentially misspecified models. Working Paper (2008)

by R Kan, C Robotti, J Shanken
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Firm’s Cash Holdings and the Cross–Section of Equity Returns †

by Dino Palazzo, Alberto Bisin, Michael Faulkender (discussant, Chuan-yang Hwang, Matthias Kredler, Cesare Robotti, Guido Ruta, Francesco Sangiorgi (discussant, Parlatore Siritto, Stijn Van Nieuwerburgh, Gianluca Violante, Neng Wang
"... Corporate cash holdings are an important predictor of the cross–section of equity returns. An investment strategy that is long in stocks of firms with a high cash–to–assets ratio and short in stocks of firms with a low cash–to–assets ratio produces an average risk–adjusted excess return that varies ..."
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Corporate cash holdings are an important predictor of the cross–section of equity returns. An investment strategy that is long in stocks of firms with a high cash–to–assets ratio and short in stocks of firms with a low cash–to–assets ratio produces an average risk–adjusted excess return that varies from a minimum of 27 to a maximum of 93 basis points per month. A Cash factor (HCMLC) can explain such a difference in average returns. A model of the firm’s financing and investment decisions provides a structural interpretation of the reason why cash holdings carry a positive risk premium.