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Investor Sentiment, Limited Arbitrage, and the Cash Holding Effect

Li, Xiafei; Luo, Di

Authors

XIAFEI LI xiafei.li@nottingham.ac.uk
Assistant Professor

Di Luo d.luo@swansea.ac.uk



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.

Citation

Li, X., & Luo, D. (2017). Investor Sentiment, Limited Arbitrage, and the Cash Holding Effect. Review of Finance, 21(6), 2141-2168. https://doi.org/10.1093/rof/rfw031

Journal Article Type Article
Acceptance Date May 4, 2016
Online Publication Date Jun 22, 2016
Publication Date 2017-10
Deposit Date Oct 17, 2016
Publicly Available Date Oct 17, 2016
Journal Review of Finance
Print ISSN 1572-3097
Electronic ISSN 1573-692X
Publisher Oxford University Press (OUP)
Peer Reviewed Peer Reviewed
Volume 21
Issue 6
Pages 2141-2168
DOI https://doi.org/10.1093/rof/rfw031
Keywords Cash holding investor sentiment, Transaction costs, Idiosyncratic volatility
Public URL http://eprints.nottingham.ac.uk/id/eprint/37594
Publisher URL https://academic.oup.com/rof/article-abstract/21/6/2141/2670103
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf
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: Xiafei Li, Di Luo, Investor Sentiment, Limited Arbitrage, and the Cash Holding Effect, Review of Finance, Volume 21, Issue 6, October 2017, Pages 2141–2168, https://doi.org/10.1093/rof/rfw031
is available online at: https://academic.oup.com/rof/article-abstract/21/6/2141/2670103

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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