The Determinants and Implications of Mutual Fund Cash Holdings: Theory and Evidence

Xuemin (Sterling) Yan

Financial Management, 2006, vol. 35, issue 2

Abstract: In this article, I examine the determinants and implications of equity mutual fund cash holdings. In cross-sectional tests, I find evidence generally supportive of a static trade-off model developed in this article. In particular, small-cap funds and funds with more-volatile fund flows hold more cash. However, I do not find that fund managers with better stockpicking skills hold less cash. Aggregate cash holdings by equity mutual funds are persistent and positively related to lagged aggregate fund flows. Aggregate cash holdings do not forecast future market returns, suggesting that equity funds as a whole do not have market timing skills.

Date: 2006
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