Analysis of the relationship between the amount of cash held by companies and future cumulative abnormal returns

Abstract

Stock companies' decision making about financial leverage is one of the most important decisions that will be taken by corporate executives. Financial decisions not only affect companies' future performance, but also can affect countries' macroeconomic performance. This study aimed to investigate the relationship between the amount of cash held by firms and their subsequent cumulative abnormal returns. In order to do this survey, 120 companies listed in Tehran Stock Exchange during 2004 to 2010 were analyzed. Evidence based on panel data analysis show that, future performance of the company whose representative is upcoming cumulative abnormal returns, shows a reduction of future stock returns due to surplus cash which indicates that the market is not able to completely predict the effects of excessive cash in current market.