What is the real relationship between cash holdings and stock returns?

Tze Chuan ‘Chewie’ Ang, F. Y.Eric C. Lam, Tai Ma, Shujing Wang, K. C.John Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

3 Citations (Scopus)


The literature has provided mixed evidence on the relationship between cash holdings and average stock returns. We empirically verify that the relationship is positive and robust to the adjustment of risk, the construction of cash holdings portfolios, and the weighting scheme of portfolio returns. We further examine a battery of potential channels that can explain the positive relationship. We find that the cash holding effect can be subsumed by accruals-related anomalies and it mainly comes from stocks with low net operating assets. It is stronger among stocks with high limits to arbitrage. Overall, our results indicate that the cash holding effect does not present a new asset-pricing regularity, but that it is a manifestation of existing anomalies closely related to mispricing.

Original languageEnglish
Pages (from-to)513-528
Number of pages16
JournalInternational Review of Economics and Finance
Publication statusPublished - Nov 2019


  • Accruals
  • Cash holdings
  • Investor sentiment
  • Limits to arbitrage
  • Mispricing
  • NOAs

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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