Cash duration, risk, and implications for stock returns

This study analyzes a new measure for Cash Duration. The new measure is based on the firm's cash holdings. Higher cash duration implies higher sensitivity of the firm's value to the firm's required return, and therefore, implies higher risk. An analysis of 140,692 firm-year observations from the U.S. cross-section of stock returns reveals that firms with higher cash duration earn higher stock returns. The effect of the new measure is both statistically and economically significant. Moreover, the effect is sustainable for diverse in-sample and out-of-sample robustness tests. The new findings can benefit researchers and practitioners alike.