Do investors infer future cash flow volatility based on liquidity?

Ben Angelo and Mitchell Johnston ()
Additional contact information
Ben Angelo: Ball State University
Mitchell Johnston: University of Dayton

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 1, No 8, 259-294

Abstract: Abstract Prior literature has studied the relationship between historic cash flow volatility and current levels of liquidity (Bates et al. in J Financ 64:1985–2021, 2009; Han and Qiu in J Corp Financ 13:43–57, 2007). In this paper, we study the relationship between liquidity and future returns. When investors observe a highly liquid balance sheet, they infer the firm’s beliefs about the risk of future cash flow volatility and price the stock accordingly. Our measure of liquidity is negatively and significantly associated with subsequent period stock returns. More liquid firms earn significantly higher levels of returns over the subsequent period, consistent with investor perceptions that liquidity is positively associated with future cash flow risk. We also find that firms with highly liquid balance sheets also realize significantly higher levels of future cash flow volatility, consistent with precautionary savings. This represents one possible explanation for why investors perceive more liquid firms as riskier than their less liquid counterparts.

Keywords: Asset liquidity; Balance sheet asset liquidity; Cash flow volatility; Precautionary savings (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-022-01094-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:60:y:2023:i:1:d:10.1007_s11156-022-01094-4

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-022-01094-4

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().