Asset Pricing Implications of Firms' Financing Constraints

Posted: 29 Feb 2008

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Lu Zhang

University of Rochester

Multiple version iconThere are 5 versions of this paper

Abstract

We use a production-based asset pricing model to investigate whether financing constraints are quantitatively important for the cross-section of returns. Specifically, we use GMM to explore the stochastic Euler equation imposed on returns by optimal investment. Our methods can identify the impact of financial frictions on the stochastic discount factor with cyclical variations in cost of external funds. We find that financing frictions provide a common factor that improves the pricing of cross-sectional returns. Moreover, the shadow cost of external funds exhibits strong procyclical variation, so that financial frictions are more important in relatively good economic conditions. (JEL E22, E44, G12)

Suggested Citation

Gomes, João F. and Yaron, Amir and Zhang, Lu, Asset Pricing Implications of Firms' Financing Constraints. The Review of Financial Studies, Vol. 19, Issue 4, pp. 1321-1356, 2006, Available at SSRN: https://ssrn.com/abstract=1097953 or http://dx.doi.org/10.1093/rfs/hhj040

João F. Gomes (Contact Author)

The Wharton School ( email )

2329 SH-DH
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lu Zhang

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
456
PlumX Metrics