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

ArXiv ID: 2412.13311 “View on arXiv”

Authors: Unknown

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.

Keywords: Cash Productivity, Factor Investing (Fama-French), Alpha Generation, Fundamental Analysis, Quantitative Strategy

Complexity vs Empirical Score

• Math Complexity: 4.0/10
• Empirical Rigor: 7.5/10
• Quadrant: Street Traders
• Why: The paper uses relatively straightforward statistical calculations (standard regression, portfolio construction) rather than advanced stochastic calculus or complex optimization, resulting in low-to-moderate math complexity. However, it demonstrates high empirical rigor through the use of real-world financial data (WRDS/CRSP), rigorous point-in-time adjustments to prevent look-ahead bias, transaction-aware portfolio construction, and backtesting with Fama-French factor controls.

  flowchart TD
    A["Research Goal<br>Determine if Cash Productivity signals<br>future stock performance"] --> B["Data & Inputs<br>WRDS financial/market data<br>Nasdaq non-financial firms"]

    B --> C["Methodology<br>Calculate Cash Returns<br>Apply Long-Only Strategy"]
    
    C --> D{"Analysis"}
    
    D --> E["Full Nasdaq Universe<br>Limited predictive power"]
    D --> F["Handpicked Portfolio<br>Strong performance"]
    
    E --> G["Key Outcome<br>Cash productivity requires<br>refined universe selection"]
    F --> G
    
    G --> H["Future Validation<br>Test transaction costs<br>& economic cycles"]
    
    style A fill:#f9f,stroke:#333,stroke-width:2px
    style B fill:#ccf,stroke:#333,stroke-width:2px
    style C fill:#9cf,stroke:#333,stroke-width:2px
    style G fill:#9fc,stroke:#333,stroke-width:2px