External Equity Financing Shocks, Financial Flows, and Asset Prices
Charles A. Dice Center Working Paper No. 2014-08
56 Pages Posted: 11 Sep 2018
Date Written: August 26, 2018
We develop a dynamic model with time variation in external equity financing costs and show that variation in these costs is important for the model to quantitatively capture the joint dynamics of firms' asset prices, real quantities, and financial flows in the U.S. economy. Growth firms and high investment firms are less risky in equilibrium because they can substitute more easily debt financing for equity financing when it becomes more costly to raise external equity, which are high marginal utility states. Using a model-implied proxy of aggregate equity issuance cost shocks we provide empirical support for the model's economic mechanism.
Keywords: Issuance shocks, asset pricing, book-to-market, investment, costly external financing, collateral constraint
JEL Classification: E23, E44, G12
Suggested Citation: Suggested Citation