Abstract

This paper explores the effects of cash holdings and financial leverage on firms’ stock performance in contrasting economic periods: booms and crises. We use US listed firms with S&P investment grade ratings as our sample and select four different periods to represent economic expansion and distress. Using an expanded Fama-French model, we conclude that cash holdings and financial leverage exhibit opposite influences during different periods. Rich cash holdings can significantly protect firm stock performance during recession periods, but conversely can damage stock performance during economic growth periods. Moreover, aggressive financial leverage strategies are positively associated with stock performance during expansion periods and negatively associated with stock performance during economic recessions.