Liquidity and the Future Stock Returns of the REIT Industry

This paper examines how deviations from expected optimal cash holdings affect future stock returns in the real estate investment trust (REIT) industry. Our findings indicate that REIT managers elect to hold less cash to reduce the agency problems of cash flow, supporting the pecking order theory that growth opportunities lead managers to retain more cash on hand. The results show that any deviation from the estimated optimal cash holdings is significantly detrimental to future market performance, suggesting that excess or insufficient cash is harmful to stock returns. The adverse influence of deviations above the optimal value is insignificantly stronger than that of deviations below the optimal value. We also find that the return performances of deviations that do not differ from the expected optimal value surpass those of deviations that differ significantly from the expected level. This implies that REIT managers determine their cash policies based on future growth opportunities and the external costs of capital. Finally, for REIT firms, holding excess or insufficient cash increases the possibility of agency conflict or underinvestment, which will consequently worsen the firm??s future performance.     

The Determinants and Implications of Mutual Fund Cash Holdings: Theory and Evidence

In this article, I examine the determinants and implications of equity mutual fund cash holdings. In cross-sectional tests, I find evidence generally supportive of a static trade-off model developed in the article. In particular, small-cap funds and funds with more-volatile fund flows hold more cash. However, I do not find that fund managers with better stock-picking skills hold less cash. Aggregate cash holdings by equity mutual funds are persistent and positively related to lagged aggregate fund flows. Aggregate cash holdings do not forecast future market returns, suggesting that equity funds as a whole do not have market timing skills.     

Excess cash holdings and shareholder value

We examine the determinants of corporate cash holdings in Australia and the impact on shareholder wealth of holding excess cash. Our results show that a trade‐off model best explains the level of a firm’s cash holdings in Australia. We find that ‘transitory’ excess cash firms earn significantly higher risk‐adjusted returns compared to ‘persistent’ excess cash firms, suggesting that the market penalises firms that hoard cash. The marginal value of cash also declines with larger cash balances, and the longer firms hold on to excess cash. The results are consistent with agency costs associated with persistence in excess cash holdings.     

The effect of financial constraints,investment policy,product market competition and corporate governance on the value of cash holdings

This study empirically investigates the value shareholders place on excess cash holdings and how shareholders’ valuation of cash holdings is associated with financial constraints, firm growth, cash‐flow uncertainty and product market competition for Australian firms from 1990 to 2007. Our results indicate that the marginal value of cash holdings to shareholders declines with larger cash holdings and higher leverage. However, firms that are more financially constrained, that have higher growth rates and that face greater uncertainty exhibit a higher marginal value of cash holdings. These findings are consistent with the explanation that excess cash holdings are not necessarily detrimental to firm value. Firms with costly external financing and that also save more cash for current operating and future investing needs find that the market values these cash hoarding policies favourably. Finally, there is limited evidence of an association between various corporate governance measures and the value of cash holdings for a shorter sample period.     

Cash holdings,costly financing and the q theory of returns

I add cash holdings into an investment-based model of stock returns. I motivate cash holdings via costly outside financing. The model shows a relation between stock returns and cash holdings and provides a structural foundation for estimating the value of cash holdings from regressions. I estimate the model at the firm level—a task notoriously difficult for q theoretic models. Adding cash into the model substantially improves model fit on average, and accounting for costly investment and financing help improve fit across firms.     

超额现金持有水平与产品市场竞争优势——来自中国上市公司的经验证据

有关企业持现动机及其经济后果的已有研究较少关注现金持有的战略效应。本文借鉴公司战略经济学理论,探索性地研究了企业超额持现对产品市场竞争优势的影响,为企业财务决策与产品市场竞争之间的紧密联系提供了新的经验证据。我们研究发现,企业超额持现具有战略效应,且超额持现水平与产品市场竞争优势呈倒U型关系。进一步的研究显示,与民营企业相比,国有企业在相对较低的超额持现水平上出现对产品市场竞争优势影响的负向净效应。     

Real option component of cash holdings,business cycle,and stock returns

Corporate managers tend to preserve cash with an expectation of a worse economy while spend cash to exercise growth opportunities with a favorable economic condition. Using three empirical proxies (book-to-market ratio, idiosyncratic volatility and return on asset) in the literature, we extract a real option component of corporate cash holdings, serving both functions of precautionary saving and exercising growth options. Our empirical results show this component, in aggregate, increases when the real GDP declines and decreases when GDP inflates. Also, stocks with returns declining more to a shock to the aggregate real option component of cash holdings earn higher future returns. Moreover, stock returns of firms with higher cash holdings positively comove with the shock to the aggregate real option component, suggesting investors prefer to hold firms with higher cash holdings when the economy is deteriorating.     

Cash and Corporate Control

The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings. However, recent studies report contradictory evidence. I focus on the takeover‐deterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase, while cash holdings significantly decline.     

Investor protection and cash holdings: Evidence from US cross-listing

This paper examines (i) whether the level of firms’ cash holdings differ depending on the strength of investor protection, (ii) whether excess cash holdings are valued more with better investor protection, and (iii) whether cross-listed firms that improve investor protection through “bonding” hold relatively more cash than non-cross-listed firms. We analyze 1405 ADR firms and their corresponding matched firms from 39 different countries and document that ADR firms have significantly higher cash holdings relative to their non-cross-listed peers, especially in recent years. The increase in cash holdings is much higher for emerging market firms because of their transition from particularly poor home country investor protection and accounting standards before cross-listing to much higher standards after cross-listing. In addition, firms with level III ADR listing, which represents the strongest investor protection, have higher cash holdings relative to other types of ADR firms.     

The effect of predation risk on cash holdings: Empirical evidence from the U.S. property‐liability insurance industry

Corporate cash holdings play a significant role in the U.S. property‐liability insurance industry yet the topic of insurer cash holdings policy has largely been overlooked by prior empirical research. While a number of studies have investigated firm‐specific factors related to cash holdings in the insurance industry, prior research has not examined how market concentration and potential predation risk impact cash holdings. We propose a new measure of market concentration and provide evidence in support of the predation risk theory. Specifically, we show that insurers exposed to more concentrated markets tend to hold more cash. Furthermore, the relation between market concentration and cash holdings is influenced by access to internal capital. While unaffiliated insurers without access to internal capital hold greater levels of cash in more concentrated markets, group insurers with access to internal capital do not hold greater levels of cash to mitigate predation risk.     

Explaining the accrual anomaly by market expectations of future returns and earnings

This study examines the accrual anomaly under the framework of the Campbell [Campbell, J.Y. (1991). A variance decomposition for stock returns. Economic Journal 101 (405), 157-179.] model. The Campbell (1991) model shows that realized asset returns are a joint function of 1) expected returns, 2) revisions in market expected future returns (i.e., return news), and 3) revisions in market expected future cash flows (i.e., cash flow news). The current study adopts the Easton [Easton, P. (2004). PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital. The Accounting Review 79 (1), 73-96.] model to estimate proxies for expected returns, return news, and cash flow news. The results show that firms with low accruals have lower expected returns than firms with high accruals, which is contradictory to prior research that argues that firms with low accruals are more risky. However, investors underestimate (overestimate) future earnings growth, a proxy for cash flow growth, for low (high) accrual firms. Further analysis demonstrates that earnings news (proxy for cash flow news) plays a major role in explaining abnormal returns associated with the accrual anomaly.     

Bayesian Alphas and Mutual Fund Persistence

We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.     

Cash holdings between public and private insurers ‒ a partial adjustment approach

Cash holdings of financial institutions, especially private firms, have been understudied in existing literature. This paper fills that gap by examining the cash holdings of US property-liability insurers in order to analyze the difference in cash holdings and cash adjustments between public and private stock insurers and between mutual and stock insurers within the private insurer category. We find that public insurers hold much less cash than private stock insurers, which differs from the findings for non-financial firms. Additionally, we find that mutual insurers hold less cash than private stock insurers. Public insurers adjust their cash holdings much faster toward their target cash levels than private stock insurers do when facing an extreme cash shortfall, but their adjustment speed is indifferent from that of private stock insurers when both having excess cash. Mutual insurers are able to adjust cash holdings slightly faster than private stock insurers when there is an extreme cash shortfall but are indifferent in adjustment speed from private stock insurers when having excess cash in hand. Overall, our results are more consistent with the financing frictions hypothesis of cash holdings and are inconsistent with the owner-manager agency problems of free cash flow.     

Expectations and the Cross-Section of Stock Returns

Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme.     

Corporate Cash Holdings and Acquisitions

We find that acquirers’ announcement returns decline with their cash holdings, but only when at least part of the payment is in the form of stock. We further find evidence that acquirers that use stock payment are overvalued, especially when they have excess cash that they could have used instead. Collectively, our results suggest that investors interpret announcements of stock acquisitions as a signal that the acquirers’ equity is overvalued and that high cash holdings intensify this signal. However, our results are inconsistent with the common belief that cash holdings induce value‐destroying acquisitions.     

Stock Repurchases and Excess Returns: An Empirical Examination

The excess returns associated with repurchase announcements are viewed largely as a reaction to management's statement that the firm's shares are underpriced; management's signal provides new information that enhances the firm's market value. Although earlier studies have found the excess return to be closely related to the premium set by managment, other factors play a part in determining both the market reaction and the premium level set by management. Among these factors ar relative market capitalization, holdings by institutions, immediate alternative uses for cash, level of insider control, recent stock price performance, relative size of the tender offer, and the resultant change in the firm's capital structure.     

Internal controls,risk management,and cash holdings

Exploiting a unique setting in China where internal controls are intended to manage risks, we investigate how internal controls shape the cash holding policies. Results show that firms with higher internal control quality (ICQ) are less likely to have abnormal cash holdings, either excess or deficit cash, and this effect is not driven by corporate governance quality. We also find that firms with higher ICQ are more likely to increase dividend payments and are less likely to increase M&A investments, especially when the firms have had a negative experience with prior M&A investments. Furthermore, our tests on the market valuation of cash holdings show that investors place a higher value on cash holdings of firms with higher ICQ. Collectively, our findings suggest that internal controls help companies shape reasonable cash policies that lead to value creation.     

Cash holdings and the bargaining power of R&D-intensive targets

Prior literature suggests that R&D-intensive firms hold large amounts of cash due to financing constraints. This paper examines whether such firms could also use cash holdings as a strategic bargaining tool in M&A transactions. Using a large sample of takeover bids announced between 1980 and 2012, we demonstrate that cash holdings positively impact R&D-intensive targets’ takeover premiums and announcement-period abnormal returns. These effects disappear in non-R&D-intensive firms. Controlling for various endogeneity and financing concerns, we also find that R&D-intensive firms build up cash holdings in anticipation of becoming a takeover target. Further analysis indicates that in R&D-intensive firms, such cash holdings are valued highly by the market. Taken together, our findings shed new light on the strategic bargaining role of corporate cash holdings in the outcomes of acquisitions targeting R&D-intensive firms.     

Corporate Financial Policy and the Value of Cash

We examine the cross‐sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi‐quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.     

Are idiosyncratic volatility and MAX priced in the Canadian market?

The negative relationship between realized idiosyncratic volatility (RIvol) and future returns uncovered by Ang et al. (2006) for the U.S. market has been attributed to return reversals. For the Canadian market where return reversals are considerably less important, we find that RIvol is positively related to future returns, even after controlling for risk loadings, illiquidity and reversals. Unlike the findings of Bali et al. (2001) for the U.S. market, we find that the relationship between extreme positive returns (MAX) and future returns for the Canadian market is positive and that idiosyncratic volatility continues to be consistently positively related to future returns after controlling for MAX. We find evidence that suggests that reversals for stocks with extreme daily returns are confined to (typically small) stocks with low institutional holdings.