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Do Funding Conditions Explain the Relation Between Cash Holdings and Stock Returns?

Published online by Cambridge University Press:  09 February 2021

Tyler K. Jensen Open the ORCID record for Tyler K. Jensen [Opens in a new window]
Tyler K. Jensen*
Affiliation:
Iowa State University Ivy College of Business
*
[email protected]
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Abstract

The prior literature links cash holdings and returns (Simutin (2010), Palazzo (2012)). Using two signals of aggregate-funding availability, I find that the positive association between cash and returns only exists during constrained funding environments. In unconstrained periods, there is no association between cash and returns. The relation in constrained environments does not appear to be related to capital expenditures, expected return, or distress risk but is more prevalent in firms undertaking research and development (R&D) expenditures. This suggests that the association between cash and returns is more consistent with expanding (or maintaining) future growth opportunities rather than being attributable to differences in capital expenditures or risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 3 , May 2022 , pp. 1174 - 1203
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

I thank Hank Bessembinder, Mike Cooper, Thomas Gilbert (the referee), Jarrad Harford (the editor), Gerald Jensen, Karl Lins, Uri Loewenstein, Mitchell Petersen, Marlene Plumlee, Jim Schallheim, and seminar participants at Iowa State University, Northeastern University, University of Arizona, University of Missouri, University of Nebraska, and University of Utah for their helpful comments.

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