Assuming that firms hold cash to generate rents (NPVs plus growth options), we define the “productivity of cash” as the rents that the firm generates per dollar of cash holdings. We investigate the empirical relationship between the productivity of cash and expected stock returns, and find that the productivity of cash is a highly significant and negative predictor of stock returns. We rationalize this finding as an implication of the inverse relation between the productivity of cash measure and the firm's financial risk. Our evidence suggests that the productivity of cash is a (new) and economically rich factor explaining the cross-section of expected stock returns-one that subsumes details of the firm's financial risk, discount rates, and the composition of the assets generating cash flows. Satyajit Chandrashekar Advanced Research Center State Street Global Advisors 1 Lincoln Street Boston, MA 02111 617-664-9603 satyajit_chandrashekar@ssga.com Ramesh K. S. Rao* McDermott Professor of Finance McCombs School of Business University of Texas at Austin Austin, TX 78712 512-475-8756 ramesh.rao@mccombs.utexas.edu November 1, 2006 Revised March 22, 2007 This version: January 26, 2009 * Corresponding author. The views expressed in this paper are those of the authors and not necessarily those of the institutions they are affiliated with. We are grateful to comments from Michael Clement, Bing Han, Mark Hooker, Hao Jiang, Woochan Kim, Alok Kumar, Ralitsa Petkova, Ehud Ronn, Laura Starks, Sheridan Titman, and the Brownbag participants at McCombs School of Business and participants at the 2007 European Financial Management Association Meetings.