Financial Constraints and Stock Returns

52 Pages Posted: 29 Aug 2000 Last revised: 18 Apr 2008

See all articles by Owen A. Lamont

Owen A. Lamont

Harvard University - Department of Economics

Christopher Polk

London School of Economics

Jesus Saa-Requejo

Vega Asset Management LLC

Multiple version iconThere are 3 versions of this paper

Date Written: October 1997

Abstract

We test whether the impact of financial constraints on firm value is observable in asset" returns. We form portfolios of firms based on observable characteristics related to financial" constraints, and test for common covariation in the stock returns of these firms. Using several" different measures of financial constraints, we find that financially constrained firms' stock" returns move together over time. This financial constraint factor in stock returns is related to not well explained by, other empirically identified factors in asset returns. Constrained firms" have remarkably low returns in our sample period of 1968-1995, both unconditionally and in the" context of empirical asset pricing models. Financial constraint returns help explain returns" following initial public offerings and dividend omissions. We find only limited support for the" hypothesis that the relative performance of financially constrained firms reflects monetary" policy, credit conditions, and business cycles.

Suggested Citation

Lamont, Owen A. and Polk, Christopher and Saa-Requejo, Jesus, Financial Constraints and Stock Returns (October 1997). NBER Working Paper No. w6210. Available at SSRN: https://ssrn.com/abstract=225968

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Christopher Polk

London School of Economics ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

Jesus Saa-Requejo

Vega Asset Management LLC ( email )

Edificio Alfredo Mahou planta 23
Plaza Manuel Gomez Moreno 2
Madrid
Spain

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