Change in Cash-Holding Policies and Stock Return Predictability in the Cross Section

The author found that stocks with a positive change in company cash holdings have significantly higher risk-adjusted returns than stocks with a negative change in cash holdings (CCH). Moreover, the return predictive power of CCH is (1) distinct from the effect of cash holdings (CH), (2) absent among cash-rich companies, (3) stronger among small-cap stocks, and (4) limited to non-January months. The CCH anomaly appears to be more “contaminated” than the CH effect by mispricing.