The Cash Effect and Market Reaction Over Three Decades

Abstract

We find that a trading strategy based on buying High Cash firms and selling Low Cash firms would have generated excess returns. These abnormal returns are “period specific,” with the strongest results occurring during the 1980s and the first six years of the 2000s. Finally, we show that the significance of the results disappears when we use alternative intuitive scaling factors for cash such as Sales and EBITDA. Our analysis suggests that the “cash effect” has been unstable through time, seems to have disappeared in the most recent time period, and is a function of the chosen scaling factor.