Cash holdings, costly financing and the q theory of returns

Neal Galpin

Accounting and Finance, 2020, vol. 60, issue S1, 1149-1174

Abstract: I add cash holdings into an investment‐based model of stock returns. I motivate cash holdings via costly outside financing. The model shows a relation between stock returns and cash holdings and provides a structural foundation for estimating the value of cash holdings from regressions. I estimate the model at the firm level—a task notoriously difficult for q theoretic models. Adding cash into the model substantially improves model fit on average, and accounting for costly investment and financing help improve fit across firms.

Date: 2020
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https://doi.org/10.1111/acfi.12406

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