Free Cash Flows and Price Momentum

Authors

Jiajia Fu, The University of Texas Rio Grande Valley
Fangming Xu, University of Bristol
Cheng Zeng, Hong Kong Polytechnic University
Lily Zheng, University of Bristol

Document Type

Article

Publication Date

4-25-2022

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.

Comments

Copyright The Author(s) 2022

Recommended Citation

Fu J, Xu F, Zeng C, Zheng L. Free Cash Flows and Price Momentum. Journal of Accounting, Auditing & Finance. April 2022. doi:10.1177/0148558X221091803

Creative Commons License

This work is licensed under a Creative Commons Attribution-No Derivative Works 4.0 International License.

Publication Title

Journal of Accounting, Auditing & Finance

DOI

10.1177/0148558X221091803