The influences of the deviation from the expected optimal cash on future stock returns

AAccording to the trade-off theory, firm managers consider the transaction and precautionary motives to determine the optimal level of cash by comparing the benefits and costs of cash holdings. The purpose of this paper is to examine the impact of deviation from expected optimal cash on future stock returns among Irans’s listed companies (Tehran Stock Exchange). The analyses are performed by using data pertaining to 119 firms for the period 1388-1392. The results show that any deviation from the estimated optimal cash holdings is significantly detrimental to future stock return, suggesting that excess or insufficient cash is harmful to stock returns. The adverse influence of deviations above the optimal value is insignificantly stronger than that of deviations below the optimal value.