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Excess Cash and Stock Returns


  • I thank Bill Christie (the editor), Murray Carloson, Adlai Fisher, Wendy Rotenberg, and seminar participants at the University of British Columbia and the 2009 Northern Finance Association meeting for their helpful comments. I gratefully acknowledge the financial support from the Bank of Montreal graduate fellowship and the Canadian Securities Institute Research Foundation scholarship. This article is based on my dissertation at the University of British Columbia.


I document a positive relationship between corporate excess cash holdings and future stock returns. The difference in returns of portfolios of high and low excess cash firms amounts to 5% annually or 6% after standard three-factor risk adjustment. Firms with more excess cash have higher market betas and earn lower returns during market downturns. High excess cash companies invest considerably more in the future than do their low cash peers, but do not experience stronger future profitability. On the whole, this evidence is consistent with the notion that excess cash holdings proxy for risky growth options.