Productivity of Short Term Assets as a Signal of Future Stock Performance

TL;DR

This study examines cash productivity as a predictor of future stock performance, finding limited predictive power broadly but strong results in carefully selected portfolios, highlighting the importance of universe selection and potential for excess returns.

Contribution

It introduces a refined approach to using cash productivity signals for stock selection, emphasizing the significance of universe selection and strategy validation.

Findings

Limited predictive power across Nasdaq universe

Strong performance in a carefully selected portfolio

Significant positive alpha after factor adjustments

Abstract

This paper investigates cash productivity as a signal for future stock performance, building on the cash-return framework of Faulkender and Wang (2006). Using financial and market data from WRDS, we calculate cash returns as a proxy for operational efficiency and evaluate a long-only strategy applied to Nasdaq-listed non-financial firms. Results show limited predictive power across the broader Nasdaq universe but strong performance in a handpicked portfolio, which achieves significant positive alpha after controlling for the Fama-French three factors. These findings underscore the importance of refined universe selection. While promising, the strategy requires further validation, including the incorporation of transaction costs and performance testing across economic cycles. Our results suggest that cash productivity, when combined with other complementary signals and careful universe selection, can be a valuable tool for generating excess returns.