Free Cash Flows and Price Momentum

Jiajia Fu, Fangming Xu, Cheng Zeng, Liyi Zheng*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

2 Citations (Scopus)
370 Downloads (Pure)

Abstract

This study investigates the role of free cash flows and (cross-sectional and time-series) price momentum in predicting future stock returns. Past returns and free cash flows each positively predict future stock returns after controlling for the other, suggesting that cash flows and momentum both contain valuable and distinctive information about future stock returns. A strategy of buying past winners with high free cash flows and shorting past losers with low free cash flows significantly outperforms the traditional momentum trading strategy. The enhanced performance is not sensitive to investor sentiment, time variations, or transaction costs. Further analysis shows that the incremental cash flow effects are largely attributable to net distributions to equity/debt holders. Overall, our findings shed light on the role of corporate fundamentals in technical trading strategies.
Original languageEnglish
Number of pages40
JournalJournal of Accounting, Auditing and Finance
Early online date25 Apr 2022
DOIs
Publication statusE-pub ahead of print - 25 Apr 2022

Bibliographical note

Publisher Copyright:
© The Author(s) 2022.

Research Groups and Themes

  • AF Financial Markets

Keywords

  • Free cash flows
  • Cross-sectional momentum
  • Time-series momentum
  • Fundamental analysis
  • Technical trading

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