Purpose: Prior studies empirically examine how financial flexibility is related to required returns by using realized returns and considering cash holdings as net debts, but they fail to find consistent results. Conjecturing that inappropriate proxy of required returns and aggregation of cash and debts caused the inconsistent results, this study revisits this topic by using a refined proxy of required returns and separating cash holdings from debts. Research design, data and methodology: This study uses a multivariate regression model to investigate the relationship between required returns on cash holdings and financial leverage. The required returns are estimated using the return decomposition method by vector autoregression model. Empirical tests use US stock market data from1968 to 2011. Results: Empirical results reveal that both cash holdings and leverage are positively related to required returns. The positive relation is stronger in economic downturns than in economic upturns. Conclusions: Three major findings are drawn. First, risky firms prefer large cash balance. Second, information shocks in the realized returns caused failure of prior studies to find consistent positive relationship between leverage and realized returns. Third, cash and leverage are related to required returns in the same direction; therefore, cash cannot be considered as negative debts.

Abstract
1. Introduction
2. Literature Review and Hypotheses
    2.1. Financial Flexibility
    2.2. Empirical Studies on the Relationbetween Financial Flexibility and RequiredReturns
    2.3. Cash Holdings and Debts
    2.4. Hypothesis Development
3. Research Design
    3.1. Regression Model
    3.2. Return Decomposition by VAR method
4. Empirical Analyses
    4.1. Sample and Descriptive Statistics
    4.2. Returns and Measures of FinancialFlexibility
    4.3. Regression Analysis
5. Additional Tests
6. Conclusion
References

• Sang-Giun YIM(Faculty of College of Business Administration, Kookmin University) Corresponding Author