Abstract
The positive cash-return relation, previously found in the USA, is similarly present in international Europe, Australasia, and the Far East (EAFE) markets over the sample period 1990–2016. Across the 20 developed non-U.S. equity markets, high-cash firms outperform low-cash firms on average by 4.2% per year after controlling for firm size, book-to-market, momentum, operating profitability, and investment. Though the observed cash premium varies with the firm’s level of debt, a rational risk-based pricing view falls short of fully understanding the effect. Instead, the observed cash premium reflects price corrections arising from the reversal of investors’ expectation errors concerning the impact of cash on the firm’s future performance and is therefore the outcome of mispricing.
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Notes
Lahart, J., “U.S. Firms Build Up Record Cash Piles”, The Wall Street Journal, June 10, 2010.
Davidson, A., “Why Are Corporations Hoarding Trillions?”, The New York Times Magazine, January 20, 2016.
We do not include selling, general and administrative expense, as this item is not broadly available among international firms. The return predictability of operating profitability is, however, not affected by this adjustment.
In line with Hirshleifer and Jiang (2010), we do not include the change in current debt, as it does not reflect market timing.
The size benchmark portfolios are formed each June by allocating all stocks in a given country to quintiles based on firm size. Monthly raw returns on the equal-weighted size portfolios are calculated for the subsequent twelve months, and the portfolios are rebalanced each year.
This approach has been proposed by Bradshaw et al. (2006) for an intuitive interpretation of the coefficient of interest.
As before, the explanatory variables are updated each June. The only exception is momentum, which is measured monthly during the first year. The decrease in the average number of sample firms from the first to the fifth year is owed to the longer horizon perspective. For instance, the first “Year 5” twelve-month period starts in July 1994.
The additional data requirements for having misvaluation indicators based on XFIN in the regressions do not drive the results. Re-estimating the baseline regression specification (1) of Table 4, on condition of having available XFIN information, produces an average coefficient estimate on SCASH of 0.33 with a t statistic of 6.05.
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Walkshäusl, C. The cash premium in international stock returns. J Asset Manag 19, 3–12 (2018). https://doi.org/10.1057/s41260-017-0056-5
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DOI: https://doi.org/10.1057/s41260-017-0056-5