Examining a new liquidity risk factor: cash and short-term investments
Keywords
Loading...
Authors
Issue Date
2019-08-28
Language
en
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
Companies with much cash and short-term investments are growth companies with a weak operating profitability and an aggressive investment style. Liquid companies carry a return premium. Annually, the 5 portfolios with the highest liquidity ratio, hence the CSI ratios, outperformed the 5 illiquid portfolios with 1,34%. However, this significant return premium is not caused by a risk premium. According to the Fama-McBeth regressions, this return premium was not caused by a risk premium, because the liquidity risk factor LMI is not priced in the cross-section of stock returns. In addition to this, liquid companies outperform illiquid companies during rising stock market as well as during recessions, respectively with 0,18% and 0,19% monthly. Liquid assets are associated with a higher risk, because it proxies for growth opportunities. However, the results show that this is not the case. Even in market downturns liquid companies do perform significantly better. These companies do not have problems with higher interest expenses when they want to raise new capital during recessions. They can invest their proceeds when these companies sell the short-term investments. This is in line with the precautionary motive of Keynes (1937).
Description
Citation
Supervisor
Faculty
Faculteit der Managementwetenschappen