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Cash flow volatility-return relation and financial constraints: international evidence.
- Source :
- Managerial Finance; 2017, Vol. 43 Issue 3, p354-378, 25p
- Publication Year :
- 2017
-
Abstract
- Purpose The purpose of this paper is to examine whether cash flow volatility (CFV) has a negative impact on future stock returns, and whether the CFV-return relation is different among financially constrained and unconstrained firms, by using a broad sample of 21 developed markets.Design/methodology/approach The study conducts portfolio analysis to test the CFV effect on returns. Risk-adjusted returns (alphas) are computed with respect to country-specific factors based on market, size, book-to-market, and momentum.Findings The strategy of buying stocks with low CFV while shorting stocks with high CFV delivers significant alphas in more than three-fourths of the markets. The alphas for the long-short portfolio based on CFV are positive and statistically significant in more than 70 percent of the countries among financially constrained firms, largely driven by the underperformance of high-CFV stocks. In comparison, the CFV effect is observed in less than 45 percent of the countries among financially unconstrained firms, and is largely driven by the outperformance of low-CFV stocks.Originality/value This study extends prior findings by providing evidence of a negative relation between CFV and stock returns in a majority of global equity markets. The evidence also suggests an important role of financial constraints in explaining this relation. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 03074358
- Volume :
- 43
- Issue :
- 3
- Database :
- Complementary Index
- Journal :
- Managerial Finance
- Publication Type :
- Academic Journal
- Accession number :
- 121488153
- Full Text :
- https://doi.org/10.1108/MF-07-2016-0214