Firm’s Cash Holdings and the Cross–Section of Equity Returns †
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BibTeX
@MISC{Palazzo_firm’scash,
author = {Dino Palazzo and Alberto Bisin and Michael Faulkender (discussant and Chuan-yang Hwang and Matthias Kredler and Cesare Robotti and Guido Ruta and Francesco Sangiorgi (discussant and Parlatore Siritto and Stijn Van Nieuwerburgh and Gianluca Violante and Neng Wang},
title = {Firm’s Cash Holdings and the Cross–Section of Equity Returns †},
year = {}
}
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Abstract
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.
