Financial Constraints and Stock Returns - Evidence from Australia

30 Pages Posted: 31 Oct 2008 Last revised: 20 Feb 2010

See all articles by H. Chan

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Xin (Simba) Chang

Nanyang Business School

Robert W. Faff

University of Queensland

George Wong

The Hong Kong Polytechnic University

Date Written: August 31, 2009

Abstract

Using multiple discriminant analysis, we construct an index that measures firms’ external financial constraints in an Australian setting. We form portfolios of firms based on our financial constraints index and find that financially constrained firms earn lower return than their unconstrained counterparts. Moreover, stock returns of financially constrained firms are found to move together, indicating the potential existence of a financial constraints factor. Neither the variation nor the mean return of the constraints factor are well explained by existing asset pricing models, suggesting an independent role for our financial constraints factor in affecting stock returns.

Keywords: Financial Constraints, Stock Returns, Australian Firms

JEL Classification: G12 G32

Suggested Citation

Chan, Howard and Chang, Xin and Faff, Robert W. and Wong, George, Financial Constraints and Stock Returns - Evidence from Australia (August 31, 2009). Available at SSRN: https://ssrn.com/abstract=1292598 or http://dx.doi.org/10.2139/ssrn.1292598

Howard Chan (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Xin Chang

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

George Wong

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

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