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Cash conversion cycle and aggregate stock returns

Qi Lin and Xi Lin

Journal of Financial Markets, 2021, vol. 52, issue C

Abstract: In this paper, we empirically evaluate U.S. market return predictability based on an aggregate measure constructed from the bottom-up firm-level cash conversion cycle (CCC) for 1976–2018. We show that in sharp contrast to previous firm-level evidence, the aggregate CCC is a strong positive predictor of the aggregate stock market return both in- and out-of-sample and outperforms a series of well-known return predictors documented in the literature. In addition, the aggregate CCC can predict cross-sectional stock portfolio returns sorted by size, value, momentum, firm-level CCC, and industry and generate substantial certainty equivalent gains associated with a market-timing strategy. Further analysis reveals that the economic source of the predictive power predominantly originates from misvaluation induced by investors’ biased beliefs about future aggregate cash flows, i.e., the cash-flow channel.

Keywords: Cash conversion cycle; Asset pricing; Return predictability; Cash-flow channel (search for similar items in EconPapers)
JEL-codes: G11 G12 G53 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:52:y:2021:i:c:s138641812030029x

DOI: 10.1016/j.finmar.2020.100560

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