Cash Position Forecasts and Stock Market Portfolio Returns
Several articles in highly regarded news outlets over the last decade have argued that firms holding relatively more cash are favored by investors. The contention is those firms holding cash will have better access to good investment prospects. This view contradicts the Jensen (1986) free cash flow proposition. This study examines the investment returns of portfolios created according to trading strategies based on expected “good” news versus “bad” news predictions of cash holdings. Results indicate that firms holding more cash than expected have superior investment returns.
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