Are Financial Constraints Priced? Evidence from Textual Analysis

88 Pages Posted: 11 May 2014 Last revised: 6 Nov 2017

Matthias M. M. Buehlmaier

The University of Hong Kong

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: March 6, 2017

Abstract

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

Buehlmaier, Matthias M. M. and Whited, Toni M., Are Financial Constraints Priced? Evidence from Textual Analysis (March 6, 2017). Simon School Working Paper No. FR 14-11. Available at SSRN: https://ssrn.com/abstract=2435116 or http://dx.doi.org/10.2139/ssrn.2435116

Matthias M. M. Buehlmaier (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China
+852 2219 4177 (Phone)
+852 2548 1152 (Fax)

HOME PAGE: http://www.buehlmaier.net/

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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