Cash holdings, costly financing and the q theory of returns

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I add cash holdings into an investment-based model of stock returns. I motivate cash holdings via costly outside financing. The model shows a relation between stock returns and cash holdings and provides a structural foundation for estimating the value of cash holdings from regressions. I estimate the model at the firm level—a task notoriously difficult for q theoretic models. Adding cash into the model substantially improves model fit on average, and accounting for costly investment and financing help improve fit across firms.

Original languageEnglish
Pages (from-to)1149-1174
Number of pages26
JournalAccounting & Finance
Issue numberS1
Publication statusPublished - Apr 2020


  • cash holdings
  • q theory
  • stock returns

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