Aggregate corporate liquidity and stock returns
By: Robin Greenwood
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 05-014; Working paper (Harvard Business School. Division of Research) -- 05-014
Publisher: Division of Research, Harvard Business School
Published: 2005
Place of publication: Boston
Language: eng
Number of pages: 47
Description: Aggregate investment in cash and liquid assets as a share of total corporate investment is negatively related to subsequent U.S. stock market returns between 1947 and 2003. The share of cash in total investment is a more stable predictor of returns than scaled price variables and performs well in out-of-sample predictability tests. Cash investment is a stronger predictor of market returns in years in which external predictability tests. Cash investment is a stronger predictor of market returns in years in which external financing is also high. The results support a theory in which firms in the aggregate actively time security issuance relative to investment needs, taking advantage of a time varying cost of capital.
Notes: "This draft: January 1, 2005."

Includes bibliographical references.