[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v33y2009i12p2301-2311.html
   My bibliography  Save this article

Cash, investments and asset returns

Author

Listed:
  • Huang, Dayong
  • Wang, Fang
Abstract
We use an investment-based asset pricing model to examine the effect of firms' investments relative to cash holdings on stock returns, assuming holding cash lowers transaction costs. We find that mimicking portfolios based on investments relative to non-cash capital and based on investments relative to cash capital are priced for various testing portfolios. On average, momentum stocks and growth stocks are more sensitive to the factor constructed using investment relative to cash.

Suggested Citation

  • Huang, Dayong & Wang, Fang, 2009. "Cash, investments and asset returns," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2301-2311, December.
    • Handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2301-2311
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00138-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2003. "The Value Spread," Journal of Finance, American Finance Association, vol. 58(2), pages 609-641, April.
    2. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    3. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-1384, December.
    4. Restoy, Fernando & Rockinger, G Michael, 1994. "On Stock Market Returns and Returns on Investment," Journal of Finance, American Finance Association, vol. 49(2), pages 543-556, June.
    5. Laura Xiaolei Liu & Toni M. Whited & Lu Zhang, 2009. "Investment-Based Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1105-1139, December.
    6. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    7. Eugene F. Fama & Kenneth R. French, 2008. "Dissecting Anomalies," Journal of Finance, American Finance Association, vol. 63(4), pages 1653-1678, August.
    8. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
    9. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    10. repec:bla:jfinan:v:59:y:2004:i:5:p:2061-2092 is not listed on IDEAS
    11. Lamont, Owen & Polk, Christopher & Saa-Requejo, Jesus, 2001. "Financial Constraints and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 529-554.
    12. Andrea Gamba & Alexander Triantis, 2008. "The Value of Financial Flexibility," Journal of Finance, American Finance Association, vol. 63(5), pages 2263-2296, October.
    13. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    14. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    15. Kandel, Shmuel & Stambaugh, Robert F, 1995. "Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 157-184, March.
    16. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    17. Ravi Jagannathan & Zhenyu Wang, 2002. "Empirical Evaluation of Asset‐Pricing Models: A Comparison of the SDF and Beta Methods," Journal of Finance, American Finance Association, vol. 57(5), pages 2337-2367, October.
    18. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    19. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, August.
    20. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    21. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 115-136.
    22. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    23. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    24. Daniel, Kent & Titman, Sheridan, 1997. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March.
    25. Grauer, Robert R. & Janmaat, Johannus A., 2009. "On the power of cross-sectional and multivariate tests of the CAPM," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 775-787, May.
    26. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, vol. 82(2), pages 289-314, November.
    27. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    28. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
    29. Barro, Robert J, 1990. "The Stock Market and Investment," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 115-131.
    30. Balvers, Ronald J. & Huang, Dayong, 2007. "Productivity-based asset pricing: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 86(2), pages 405-445, November.
    31. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    32. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    33. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    34. D'Mello, Ranjan & Krishnaswami, Sudha & Larkin, Patrick J., 2008. "Determinants of corporate cash holdings: Evidence from spin-offs," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1209-1220, July.
    35. Yuhang Xing, 2008. "Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1767-1795, July.
    36. Huberman, Gur, 1984. "External Financing and Liquidity," Journal of Finance, American Finance Association, vol. 39(3), pages 895-908, July.
    37. repec:bla:jfinan:v:58:y:2003:i:2:p:609-642 is not listed on IDEAS
    38. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, February.
    39. Lee Pinkowitz & Rohan Williamson, 2007. "What is the Market Value of a Dollar of Corporate Cash?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(3), pages 74-81, June.
    40. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    41. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    42. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
    43. Qing Li & Maria Vassalou & Yuhang Xing, 2006. "Sector Investment Growth Rates and the Cross Section of Equity Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1637-1665, May.
    44. Cochrane, John H, 1991. "Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations," Journal of Finance, American Finance Association, vol. 46(1), pages 209-237, March.
    45. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 335-359, September.
    46. Balvers, Ronald J. & Huang, Dayong, 2009. "Evaluation of linear asset pricing models by implied portfolio performance," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1586-1596, September.
    47. Fama, Eugene F. & French, Kenneth R., 2006. "Profitability, investment and average returns," Journal of Financial Economics, Elsevier, vol. 82(3), pages 491-518, December.
    48. Haushalter, David & Klasa, Sandy & Maxwell, William F., 2007. "The influence of product market dynamics on a firm's cash holdings and hedging behavior," Journal of Financial Economics, Elsevier, vol. 84(3), pages 797-825, June.
    49. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ben Said Hatem, 2016. "Factors Explaining Firm Investment: An International Comparison," International Business Research, Canadian Center of Science and Education, vol. 9(3), pages 112-120, March.
    2. Han-Ching Huang & Yong-Chern Su & Chun-Chi Shih, 2013. "Speed of Convergence to Market Efficiency: Example of Top loser Stocks," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 591-601.
    3. Su, Yong-Chern & Huang, Han-Ching & Hsu, Ming-Wei, 2010. "Convergence to market efficiency of top gainers," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2230-2237, September.
    4. Gu, Li & Huang, Dayong, 2010. "Sales order backlogs and momentum profits," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1564-1575, July.
    5. Gray, Philip & Johnson, Jessica, 2011. "The relationship between asset growth and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 670-680, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    2. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    3. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    4. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    5. Huang, Yuan & Lam, F.Y. Eric C. & Wei, K.C. John, 2014. "The q-theory explanation for the external financing effect: New evidence," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 69-81.
    6. Lam, F.Y. Eric C. & Wei, K.C. John, 2011. "Limits-to-arbitrage, investment frictions, and the asset growth anomaly," Journal of Financial Economics, Elsevier, vol. 102(1), pages 127-149, October.
    7. Christian Walkshäusl & Sebastian Lobe, 2014. "The Alternative Three†Factor Model: An Alternative beyond US Markets?," European Financial Management, European Financial Management Association, vol. 20(1), pages 33-70, January.
    8. repec:gnv:wpaper:unige:76321 is not listed on IDEAS
    9. Patrick Gagliardini & Elisa Ossola & Olivier Scaillet, 2016. "Time‐Varying Risk Premium in Large Cross‐Sectional Equity Data Sets," Econometrica, Econometric Society, vol. 84, pages 985-1046, May.
    10. Li, Dongmei & Zhang, Lu, 2010. "Does q-theory with investment frictions explain anomalies in the cross section of returns?," Journal of Financial Economics, Elsevier, vol. 98(2), pages 297-314, November.
    11. Couch, Robert & Wu, Wei, 2012. "Private investment and public equity returns," Journal of Economics and Business, Elsevier, vol. 64(2), pages 160-184.
    12. Su, Xuan-Qi, 2016. "Does systematic distress risk drive the investment growth anomaly?," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 240-248.
    13. Chuan ‘Chewie’ Ang, Tze & Lam, F.Y. Eric C. & Ma, Tai & Wang, Shujing & Wei, K.C. John, 2019. "What is the real relationship between cash holdings and stock returns?," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 513-528.
    14. Xiaoji Lin & Lu Zhang, 2011. "Covariances versus Characteristics in General Equilibrium," NBER Working Papers 17285, National Bureau of Economic Research, Inc.
    15. Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2013. "Do the production-based factors capture the time-varying patterns in stock returns?," Emerging Markets Review, Elsevier, vol. 15(C), pages 122-135.
    16. Chen, Sheng-Syan & Wang, Yanzhi, 2012. "Financial constraints and share repurchases," Journal of Financial Economics, Elsevier, vol. 105(2), pages 311-331.
    17. Kewei Hou & Chen Xue & Lu Zhang, 2012. "Digesting Anomalies: An Investment Approach," NBER Working Papers 18435, National Bureau of Economic Research, Inc.
    18. Kwon, Ji Ho, 2024. "Bank credit, consumption risk, and the cross-section of expected returns," International Review of Financial Analysis, Elsevier, vol. 92(C).
    19. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, January.
    20. Clarke, Charles, 2022. "The level, slope, and curve factor model for stocks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 159-187.
    21. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2009. "Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4301-4334, November.

    More about this item

    Keywords

    Investments Asset pricing Cash;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2301-2311. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.