Investor sentiment, limited arbitrage, and the cash holding effect
Investor sentiment, limited arbitrage, and the cash holding effect
We examine the investor sentiment and limits-to-arbitrage explanations for the positive cross-sectional relation between cash holdings and future stock returns. Consistent with the investor sentiment hypothesis, we find that the cash holding effect is significant when sentiment is low, and it is insignificant when sentiment is high. In addition, the cash holding effect is strong among stocks with high transaction costs, high short selling costs, and large idiosyncratic volatility, indicating that arbitrage on the cash holding effect is costly and risky. In line with the limits-to-arbitrage hypothesis, high costs and risk prevent rational investors from exploiting the cash holding effect.
2141-2168
Li, Xiafei
afcb9d26-b639-4ee8-b09c-0d5263172e16
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
1 October 2017
Li, Xiafei
afcb9d26-b639-4ee8-b09c-0d5263172e16
Luo, Di
cc1b0fa7-f630-45dc-ab05-495f9023148f
Li, Xiafei and Luo, Di
(2017)
Investor sentiment, limited arbitrage, and the cash holding effect.
Review of Finance, 21 (6), , [rfw031].
(doi:10.1093/rof/rfw031).
Abstract
We examine the investor sentiment and limits-to-arbitrage explanations for the positive cross-sectional relation between cash holdings and future stock returns. Consistent with the investor sentiment hypothesis, we find that the cash holding effect is significant when sentiment is low, and it is insignificant when sentiment is high. In addition, the cash holding effect is strong among stocks with high transaction costs, high short selling costs, and large idiosyncratic volatility, indicating that arbitrage on the cash holding effect is costly and risky. In line with the limits-to-arbitrage hypothesis, high costs and risk prevent rational investors from exploiting the cash holding effect.
Text
rfw031
- Accepted Manuscript
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Accepted/In Press date: 4 May 2016
e-pub ahead of print date: 22 June 2016
Published date: 1 October 2017
Organisations:
Banking & Finance
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Local EPrints ID: 410568
URI: http://eprints.soton.ac.uk/id/eprint/410568
PURE UUID: 7c3c0691-93d4-46a3-92e2-6bd8994bf826
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Date deposited: 09 Jun 2017 09:08
Last modified: 16 Mar 2024 05:21
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Author:
Xiafei Li
Author:
Di Luo
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