We examine the strategic role of cash in a two-stage competition model featuring a first-mover advantage in product markets and time delays in outside financing. Due to the joint effect of the first-mover advantage, time to finance, market profitability, participation cost, and the arrival rate of investment opportunities, large cash holdings can arise in equilibrium in both concentrated and diffuse industries, leading to a rich relation between industry concentration and cash holdings. The model also reveals novel interactions of these drivers of cash holdings that are consistent with empirical evidence. Furthermore, despite that cash is held to enable fast responses to investment opportunities, the correlation between cash holdings and realized investment is low. Our model provides an explanation for the large variation in cash holdings across industries and over time, and the strong correlation between cash holdings and R&D.

We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the arbitrage pricing theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM anomalies) by employing the asymptotic principal components method. Our benchmark model contains six statistical factors and clearly dominates, in both economic and statistical terms, most of the empirical multifactor models proposed in the literature by a good margin. These results represent a critical challenge to the current workhorse models in terms of explaining large-scale equity risk premiums. (JEL G10, G12) Received December 27, 2019; editorial decision October 20, 2020 by Editor Thierry Foucault.

We examine the causal effect of limits to arbitrage on 11 well‐known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short‐sale constraints for a quasi‐random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long–short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.