Cash flow volatility-return relation and financial constraints: international evidence

Darshana D. Palkar (H. Wayne Huizenga College of Business and Entrepreneurship, Nova Southeastern University, Fort Lauderdale-Davie, Florida, USA)

Managerial Finance

ISSN: 0307-4358

Publication date: 13 March 2017



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.


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.


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.


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.



Palkar, D. (2017), "Cash flow volatility-return relation and financial constraints: international evidence", Managerial Finance, Vol. 43 No. 3, pp. 354-378.

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