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 ins...
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| Format: | Article |
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Oxford University Press
2017
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| Online Access: | https://eprints.nottingham.ac.uk/37594/ |
| _version_ | 1848795493357846528 |
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| author | Li, Xiafei Luo, Di |
| author_facet | Li, Xiafei Luo, Di |
| author_sort | Li, Xiafei |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T19:32:58Z |
| format | Article |
| id | nottingham-37594 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:32:58Z |
| publishDate | 2017 |
| publisher | Oxford University Press |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-375942020-05-04T19:09:54Z https://eprints.nottingham.ac.uk/37594/ Investor sentiment, limited arbitrage and the cash holding effect Li, Xiafei Luo, Di 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. Oxford University Press 2017-09-30 Article PeerReviewed Li, Xiafei and Luo, Di (2017) Investor sentiment, limited arbitrage and the cash holding effect. Review of Finance, 21 (6). pp. 2141-2168. ISSN 1573-692X Cash holding investor sentiment Transaction costs Idiosyncratic volatility http://rof.oxfordjournals.org/content/early/2016/06/22/rof.rfw031.abstract doi:10.1093/rof/rfw031 doi:10.1093/rof/rfw031 |
| spellingShingle | Cash holding investor sentiment Transaction costs Idiosyncratic volatility Li, Xiafei Luo, Di Investor sentiment, limited arbitrage and the cash holding effect |
| title | Investor sentiment, limited arbitrage and the cash holding effect |
| title_full | Investor sentiment, limited arbitrage and the cash holding effect |
| title_fullStr | Investor sentiment, limited arbitrage and the cash holding effect |
| title_full_unstemmed | Investor sentiment, limited arbitrage and the cash holding effect |
| title_short | Investor sentiment, limited arbitrage and the cash holding effect |
| title_sort | investor sentiment, limited arbitrage and the cash holding effect |
| topic | Cash holding investor sentiment Transaction costs Idiosyncratic volatility |
| url | https://eprints.nottingham.ac.uk/37594/ https://eprints.nottingham.ac.uk/37594/ https://eprints.nottingham.ac.uk/37594/ |