The Cash Conversion Cycle Spread: International Evidence

Catherine Chen; Siu Kai Choy; Yongxian Tan

doi:https://doi.org/10.1016/j.jbankfin.2022.106517

The Cash Conversion Cycle Spread: International Evidence

Catherine Chen, Siu Kai Choy^*, Yongxian Tan

^*Corresponding author for this work

Accounting & Financial Management

Research output: Contribution to journal › Article › peer-review

5 Citations (Scopus)

Abstract

The cash conversion cycle (CCC) is important for fundamental analysis as an indicator of management effectiveness in cash and financing. However, there is a lack of empirical evidence for its implications on asset pricing except for the very recent findings that high CCCs negatively predict stock returns in the U.S. By investigating 47 developed and emerging markets from 1993 to 2018, we find a mild CCC effect across the globe. The Low-minus-High equal-weighted hedge portfolios sorted by components of CCC yield significant Fama-French five-factor alphas ranging from 0.277% to 0.730% per month. Our results are consistent with a mispricing explanation by analyzing earnings prediction, announcement returns around future earnings, and limits of arbitrage although there is also some evidence for a risk-based explanation. Moreover, the CCC effect is stronger in emerging markets than developed markets and for markets with more political risk and less integrated with the global market.

Original language	English
Article number	106517
Journal	Journal of Banking and Finance
Volume	140
DOIs	https://doi.org/10.1016/j.jbankfin.2022.106517
Publication status	Published - Jul 2022

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title = "The Cash Conversion Cycle Spread: International Evidence",

abstract = "The cash conversion cycle (CCC) is important for fundamental analysis as an indicator of management effectiveness in cash and financing. However, there is a lack of empirical evidence for its implications on asset pricing except for the very recent findings that high CCCs negatively predict stock returns in the U.S. By investigating 47 developed and emerging markets from 1993 to 2018, we find a mild CCC effect across the globe. The Low-minus-High equal-weighted hedge portfolios sorted by components of CCC yield significant Fama-French five-factor alphas ranging from 0.277% to 0.730% per month. Our results are consistent with a mispricing explanation by analyzing earnings prediction, announcement returns around future earnings, and limits of arbitrage although there is also some evidence for a risk-based explanation. Moreover, the CCC effect is stronger in emerging markets than developed markets and for markets with more political risk and less integrated with the global market. ",

author = "Catherine Chen and Choy, {Siu Kai} and Yongxian Tan",

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AU - Tan, Yongxian

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The Cash Conversion Cycle Spread: International Evidence

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