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

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.

Keywords

Citation

Palkar, D. (2017), "Cash flow volatility-return relation and financial constraints: international evidence", Managerial Finance, Vol. 43 No. 3, pp. 354-378. https://doi.org/10.1108/MF-07-2016-0214

Download as .RIS

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.