Cash conversion cycle and aggregate stock returns
Qi Lin and
Journal of Financial Markets, 2021, vol. 52, issue C
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)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:52:y:2021:i:c:s138641812030029x
Access Statistics for this article
Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam
More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().