Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns
Cornell University; National Bureau of Economic Research (NBER)
Cheung Kong Graduate School of Business
February 10, 2010
Journal of Money, Credit, and Banking, Forthcoming
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
Date posted: March 19, 2005 ; Last revised: February 18, 2010
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