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CASH HOARDS AND CHANGES IN INVESTORS' OUTLOOK
Author(s) -
Asem Ebenezer,
Alam Shamsul
Publication year - 2014
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12031
Subject(s) - cash , monetary economics , shareholder , operating cash flow , stock (firearms) , earnings , cash flow statement , business , economics , cash management , cash and cash equivalents , finance , corporate governance , mechanical engineering , engineering
Declining markets reflect declines in investors' outlook for firm prospects, increasing their expectation that firms will waste excess cash. In contrast, excess cash is useful in mitigating financial distress associated with poor earnings. We find an inverted U‐shaped relation between stock return and excess cash in declining markets, suggesting the positive effect of excess cash dominates at low levels of cash, while the negative effect dominates at high levels. We also document an inverted U‐shaped relation for firms with weak shareholder power and firms with high information asymmetry in advancing markets. These suggest investors' desire for cash reserves is limited.