Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns

Abstract:     
Using comprehensive firm- and aggregate-level data, this paper studies the real and financial implications of capital market imperfections. We first examine whether financially constrained firms' business fundamentals (capital spending and operating earnings) are more sensitive to macroeconomic movements than unconstrained firms' fundamentals. We then examine whether financial constraint "return factors" respond to macroeconomic shocks in tandem with the responses from business fundamentals. The evidence in this paper points to financial constraints affecting both fundamental quantities and asset returns.

Number of Pages in PDF File: 22

Keywords: Financial constraints, equity returns, credit spreads, systematic risk, macroeconomic shocks

JEL Classification: G12

Accepted Paper Series