Are Financial Constraints Priced? Evidence from Textual Analysis
88 Pages Posted: 11 May 2014 Last revised: 6 Nov 2017
Date Written: March 6, 2017
We construct novel measures of financial constraints using textual analysis of firms' annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. Our results are strongest when we consider debt constraints. A portfolio based on this measure earns an annualized risk-adjusted excess return of 6.5%.
Keywords: Financial constraints, textual analysis, market efficiency
JEL Classification: G14, G32
Suggested Citation: Suggested Citation