External Equity Financing Shocks, Financial Flows, and Asset Prices

Charles A. Dice Center Working Paper No. 2014-08

Fisher College of Business Working Paper No. 2014-03-08

56 Pages Posted: 11 Sep 2018

See all articles by Frederico Belo

Frederico Belo

University of Minnesota; INSEAD; National Bureau of Economic Research (NBER)

Xiaoji Lin

University of Minnesota

Fan Yang

University of Connecticut - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 26, 2018

Abstract

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

Belo, Frederico and Lin, Xiaoji and Yang, Fan, External Equity Financing Shocks, Financial Flows, and Asset Prices (August 26, 2018). Charles A. Dice Center Working Paper No. 2014-08; Fisher College of Business Working Paper No. 2014-03-08. Available at SSRN: https://ssrn.com/abstract=2434156 or http://dx.doi.org/10.2139/ssrn.2434156

Frederico Belo

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xiaoji Lin (Contact Author)

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Fan Yang

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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