The cash conversion cycle spread: International evidence

Catherine Huirong Chen, Siu Kai Choy and Yongxian Tan

Journal of Banking & Finance, 2022, vol. 140, issue C

Abstract: The cash conversion cycle (CCC) is important for fundamental analysis as an indicator of management effectiveness in cash and financing. However, there is a lack of empirical evidence for its implications on asset pricing except for the very recent findings that high CCCs negatively predict stock returns in the U.S. By investigating 47 developed and emerging markets from 1993 to 2018, we find a mild CCC effect across the globe. The Low-minus-High equal-weighted hedge portfolios sorted by components of CCC yield significant Fama-French five-factor alphas ranging from 0.277 to 0.730% per month. Our results are consistent with a mispricing explanation by analyzing earnings prediction, announcement returns around future earnings, and limits of arbitrage although there is also some evidence for a risk-based explanation. Moreover, the CCC effect is stronger in emerging markets than developed markets and for markets with more political risk and less integrated with the global market.

Keywords: Cash conversion cycle; Mispricing; Anomaly; Market efficiency; International stock markets (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:140:y:2022:i:c:s037842662200111x

DOI: 10.1016/j.jbankfin.2022.106517

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