Industries and the cash conversion cycle effect : an empirical investigation of industries as the driver of the return spread

Abstract

This thesis investigates whether there is a cash conversion cycle (CCC) effect in the industry component of stock returns. Using a panel of U.S. stock returns from July 1976 to December 2015, we find that a zero-investment portfolio with a long position in the lowest CCC decile and a short position in the highest CCC decile earns annual abnormal returns of 4%–7%. As the CCC varies considerably between industries, we check whether this portfolio systematically loads on specific industries. However, by constructing industry strategies that buy industries with low average CCCs and sell industries with high average CCCs instead of individual stocks, we do not find evidence of an industry CCC effect. As the CCC also varies considerably within industries, the portfolio of the strategy that buys and sells individual stocks does in fact appear to be well-diversified. The CCC effect therefore seems to be driven by individual stocks, but the underlying driver of this remains a puzzle. Keywords – Cash conversion cycle, Asset pricing, Industry risk