External Equity Financing Shocks, Financial Flows, and Asset Prices
University of Minnesota; National Bureau of Economic Research (NBER)
Ohio State University (OSU) - Fisher College of Business
The University of Hong Kong
May 6, 2014
Charles A. Dice Center Working Paper No. 2014-08
Fisher College of Business Working Paper No. 2014-03-08
We study the impact of aggregate shocks to the cost of equity issuance on asset prices. We document that an empirical proxy of equity issuance cost shocks captures systematic risk in economy. Exposure to this shock helps price the cross section of stock returns including book-to-market, size, investment, debt growth, and issuance portfolios. We then propose a dynamic investment-based model that features an aggregate shock to the firms’ cost of external equity issuance, and a collateral constraint. Our central finding is that time varying external financing costs are important for the model to quantitatively capture the joint dynamics of firms’ real quantities, financing flows, and asset prices. Furthermore, the model also replicates the failure of the unconditional CAPM in pricing the cross-sectional expected returns.
Number of Pages in PDF File: 61
Keywords: Issuance shocks, asset pricing, book-to-market, investment, costly external financing, collateral constraint
JEL Classification: E23, E44, G12working papers series
Date posted: May 9, 2014
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