Do Funding Conditions Explain the Relation Between Cash Holdings and Stock Returns?

Tyler K. Jensen

Prior literature links cash holdings and returns (Simutin (2010), Palazzo (2012)). Using two signals of aggregate funding availability, we find that the positive association between cash and returns only exists during constrained funding environments. In unconstrained periods, there is no association between cash and returns. The relation in constrained environments does not appear related to capital expenditures, expected return or distress risk, but is more prevalent in firms undertaking R&D expenditures. This suggests that the association between cash and returns is more consistent with expanding (or maintaining) future growth opportunities, rather than attributed to differences in capital expenditures or risk.