- Apply for Authority
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
Financial Flexibility on Required Returns: Vector Autoregression Return Decomposition Approach
- Downloaded
- Viewed
Abstract
Purpose: Prior studies empirically examine how financial flexibility is related to required returns by using realized returns and considering cash holdings as net debts, but they fail to find consistent results. Conjecturing that inappropriate proxy of required returns and aggregation of cash and debts caused the inconsistent results, this study revisits this topic by using a refined proxy of required returns and separating cash holdings from debts. Research design, data and methodology: This study uses a multivariate regression model to investigate the relationship between required returns on cash holdings and financial leverage. The required returns are estimated using the return decomposition method by vector autoregression model. Empirical tests use US stock market data from1968 to 2011. Results: Empirical results reveal that both cash holdings and leverage are positively related to required returns. The positive relation is stronger in economic downturns than in economic upturns. Conclusions: Three major findings are drawn. First, risky firms prefer large cash balance. Second, information shocks in the realized returns caused failure of prior studies to find consistent positive relationship between leverage and realized returns. Third, cash and leverage are related to required returns in the same direction; therefore, cash cannot be considered as negative debts.
- keywords
- Financial Flexibility, Cash Holdings, Leverage, Vector Autoregression, Return Decomposition
Reference
Acharya, V. V., Almeida, H., & Campello, M. (2007). Is cash negative debt? A hedging perspective on corporate financial policies. Journal of Financial Intermediation, 16(4), 515-554.
Acharya, V. V., Davydenko, S. A., & Strebulaev, I. A. (2012). Cash holdings and credit risk. Review of Financial Studies, 25(12), 3572-3609.
Almeida, H., Campello, M., & Weisbach, M. S. (2011). Corporate financial and investment policies when future financing is not frictionless. Journal of Corporate Finance, 17(3), 675-693.
Baimukhamedova, A., Baimukhamedova, G., & Luchaninova, l. (2017). Financial Disclosure and the Cost of Equity Capital: The Empirical Test of the Largest Listed Companies of Kazakhstan. The Journal of Asian Finance, Economics and Business, 4(3), 5-17.
Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do US firms hold so much more cash than they used to?. Journal of Finance, 64(5), 1985-2021.
Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528.
Campello, M., Graham, J. R., & Harvey, C. R. (2010). the real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470-487.
Denis, D. J. (2011). Financial flexibility and corporate liquidity. Journal of Corporate Finance, 17(3), 667-674.
Dichev, I. D. (1998). Is the risk of bankruptcy a systematic risk?. The Journal of Finance, 53(3), 1131-1147.
Elton, E. J. (1999). Expected return, realized return, and asset pricing tests. The Journal of Finance, 54(4), 1199-1220.
Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427- 465.
Ferrarini, B., & Hinojales, M. (2019). State-Owned Enterprises and Debt Sustainability Analysis: The Case of the People’s Republic of China. The Journal of Asian Finance, Economics and Business, 6(1), 91-105.
Ferrarini, B., Hinojales, M., & Scaramozzino, P. (2017). Chinese Corporate Leverage Determinants. The Journal of Asian Finance, Economics and Business, 4(1), 5-18.
George, T. J., & Hwang, C.-Y. (2010). A resolution of the distress risk and leverage puzzles in the cross section of stock returns. Journal of Financial Economics, 96(1), 56-79.
Haushalter, D., Klasa, S., & Maxwell, W. F. (2007). The influence of product market dynamics on a firm's cash holdings and hedging behavior. Journal of Financial Economics, 84(3), 797-825.
Johnson, T. C. (2004). Forecast dispersion and the cross section of expected returns. The Journal of Finance, 59(5), 1957-1978.
Kim, S.-S., & Lee, J. H. (2016). The Marginal Value of Cash and Agency Conflicts in Korean Firms. The Journal of Asian Finance, Economics and Business, 3(4), 5-16.
Kim, C.-S., Mauer, D. C., & Sherman, A. E. (1998). The Determinants of Corporate Liquidity: Theory and Evidence. Journal of Financial & Quantitative Analysis, 33(3), 335-359.
Le, A. H., & Kim, T. (2020). The Effects of Economic Freedom on Firm Investment in Vietnam. The Journal of Asian Finance, Economics and Business, 7(3), 9-15.
McLean, D. R. (2011). Share issuance and cash savings. Journal of Financial Economics, 99(3), 693-715.
Modigliani, F., & Merton, H. M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175.
Penman, S. H., Richardson, S. A., & Tuna, İ. (2007). The book-toprice effect in stock returns: Accounting for leverage. Journal of Accounting Research, 45(2), 427-467.
Petkova, R., & Zhang, L. (2005). Is value riskier than growth?. Journal of Financial Economics, 78(1), 187-202.
Simutin, M. (2010). Excess cash and stock returns. Financial Management, 39(3), 1197-1222.
Son, S.-H. (2015). A Study on the Cash Policies of Retail Firms. Journal of Distribution Science, 13(3), 69-77.
Vuolteenaho, T. (2002). What drives firm-level stock returns?. The Journal of Finance, 57(1), 233-264.
Yim, S.-G. (2020). The Pricing of Accruals Quality with Expected Returns: Vector Autoregression Return Decomposition Approach. The Journal of Industrial Distribution & Business, 11(3), 7-17.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations