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Cash holdings, costly financing and the q theory of returns

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  • Neal Galpin

Abstract

I add cash holdings into an investment‐based model of stock returns. I motivate cash holdings via costly outside financing. The model shows a relation between stock returns and cash holdings and provides a structural foundation for estimating the value of cash holdings from regressions. I estimate the model at the firm level—a task notoriously difficult for q theoretic models. Adding cash into the model substantially improves model fit on average, and accounting for costly investment and financing help improve fit across firms.

Suggested Citation

  • Neal Galpin, 2020. "Cash holdings, costly financing and the q theory of returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1149-1174, April.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:s1:p:1149-1174
    DOI: 10.1111/acfi.12406
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    References listed on IDEAS

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