Abstract

http://ssrn.com/abstract=2434156
 


 



External Equity Financing Shocks, Financial Flows, and Asset Prices


Frederico Belo


University of Minnesota; National Bureau of Economic Research (NBER)

Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

Fan Yang


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

Abstract:     
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, G12

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Date posted: May 9, 2014  

Suggested Citation

Belo, Frederico and Lin, Xiaoji and Yang, Fan, External Equity Financing Shocks, Financial Flows, and Asset Prices (May 6, 2014). Charles A. Dice Center Working Paper No. 2014-08; Fisher College of Business Working Paper No. 2014-03-08. Available at SSRN: http://ssrn.com/abstract=2434156 or http://dx.doi.org/10.2139/ssrn.2434156

Contact Information

Frederico Belo
University of Minnesota ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Xiaoji Lin (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
Fan Yang
The University of Hong Kong ( email )
Pokfulam Road
Hong Kong, Pokfulam HK
China
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