Excess Cash And The Cross-Section Stock Returns

Cash,as an important asset in an enterprise,not only relates to the daily production and operation activities of the enterprise,but also maintains a series of other transaction behaviors of the enterprise,such as investment behavior,financing behavior,merger and acquisition behavior.As of the semi-annual report of 2018,all non-bank listed companies have held 9.61 trillion in monetary funds,12.47% of all assets.The level of cash holdings is very important for enterprises,and the change of cash holdings will directly affect the sustainability of daily operation of enterprises.When the cash holdings of enterprises are too small,companies are prone to run into difficulties when liquidity is tight,and even lead to bankruptcy.At the same time,cash is the most easily controlled assets by the management.When the company holds more cash,the management has the possibility of using the company's assets to meet their own private interests or overinvestment.In the real capital market,there are asymmetric information and principal-agent problems.These factors will lead to the deviation of cash holding decisions,resulting in unreasonable cash holding behavior.Therefore,the issue of cash holdings has always been a hot topic in academic research both at home and abroad.Firstly,this paper summarizes the motivation theory,behavior and adjustment theory of cash holdings,summarizes the domestic and foreign research on cash holdings from the perspective of stakeholders,and analyzes the relationship between corporate cash holdings and corporate value.Then,the paper reviews the development of asset pricing models,including CAPM,Fama-French three-factor model and five-factor model.By reviewing the pricing models,this paper uses them as tools to verify the relationship between stock returns and cash holdings.Using factor models to verify the return of excess cash holdings portfolio is also different from the previous studies using OLS regression method to directly study the return of corporate value,which is one of the important innovations of this paper.As Small and Medium Enterprises(SMEs)and Growth Enterprise Market(GEM)listed companies account for a large proportion of the listed stocks on the Shenzhen Stock Exchange,many of them are small in size,and their operations are greatly affected by mergers and acquisitions,and stock prices fluctuate too sharply,seriously deviating from the potential value.Therefore,this paper takes the financial data of Listed Companies in Shanghai Stock Exchange of China from 2009 to 2017 as a sample to study the scale of cash assets that listed companies need to meet their daily operations and partly because of preventive motives in equilibrium.The regression results show that cash holdings are positively affected by asset size,valuation level,operating asset size,cash flow level and cash flow fluctuation of the industry,but negatively affected by investment expenditure,long-term liabilities and cash management ability.Furthermore,the difference between the actual cash holdings and the expected holdings of the regression model is defined as the excess cash holdings.On this basis,the monthly returns of listed companies from July 2010 to June 2008 are taken as sample data,and the monthly returns of stock portfolios are obtained by grouping the excess cash holdings.It is found that the stock portfolio with more excess cash has a significant excess return than the stock portfolio with less cash.This excess return has certain explanatory power under the factor model.Regression results show that market value factor and scale factor have significant positive impact on excess income,while book-to-market value ratio factor has significant negative impact on excess income.That is,when the market risk premium is high,the small-cap stock portfolio is better than the large-cap stock portfolio,and the high book-to-market ratio is relatively low book-tomarket ratio is worse than the stock performance,the stock portfolio with more excess cash has more excess returns than the stock portfolio with less excess cash.After the GRS test,the factor model really has a better explanatory power for group returns.In the inspection process,it is also proved that investors believe that excess cash is a risk factor.Finally,this paper compares the changes of some important financial data in different groups of excess cash holdings before and after the fiscal year.It is found that although investors give a higher risk premium for holding more excess cash,the results are not as good as investors expected.The profitability,growth ability and investment ability of the groups with more excess cash did not significantly improve or surpass the changes of other groups in the following fiscal year,only the cash dividend ratio was significantly improved,but not significantly superior to other groups.Unlike most literatures which directly discuss the relationship between cash holdings and corporate value,this paper selects the excess cash holdings of listed companies as the cash holdings index;secondly,unlike the direct regression of corporate value in existing literatures,this paper uses factor model to measure the returns of stock portfolios grouped by excess cash.The situation is studied from the perspective of investors.It provides a new perspective and reasonable suggestions for investors and managers to formulate investment strategies and cash holding policies in the future.It is helpful to enhance investors' value identification,promote enterprise value promotion and capital market prosperity.