Investor sentiment, limited arbitrage and the cash holding effect

Li, Xiafei and Luo, Di (2016) Investor sentiment, limited arbitrage and the cash holding effect. Review of Finance . ISSN 1573-692X

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Abstract

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.

Item Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record Li, Xiafei, Luo, Di Investor Sentiment, Limited Arbitrage, and the Cash Holding Effect. Review of Finance. Vol, [?], Issue [?] is available online at: http://rof.oxfordjournals.org/content/early/2016/06/22/rof.rfw031.abstract
Keywords: Cash holding investor sentiment, Transaction costs, Idiosyncratic volatility
Schools/Departments: University of Nottingham UK Campus > Faculty of Social Sciences > Nottingham University Business School
Identification Number: https://doi.org/10.1093/rof/rfw031
Depositing User: Fuller, Stella
Date Deposited: 17 Oct 2016 10:32
Last Modified: 17 Oct 2016 15:01
URI: http://eprints.nottingham.ac.uk/id/eprint/37594

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