Asset Pricing Implications of Firms' Financing Constraints

58 Pages Posted: 17 Oct 2002

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: October 2002

Abstract

We incorporate costly external finance in an investment-based asset pricing model and investigate whether financing frictions are quantitatively important for pricing a cross-section of expected returns. We show that common assumptions about the nature of the financing frictions are captured by a simple "financing cost" function, equal to the product of the financing premium and the amount of external finance. This approach provides a tractable framework for empirical analysis. Using GMM, we estimate a pricing kernel that incorporates the effects of financing constraints on investment behavior. The key ingredients in this pricing kernel depend not only on "fundamentals", such as profits and investment, but also on the financing variables, such as default premium and the amount of external financing. Our findings, however, suggest that the role played by financing frictions is fairly negligible, unless the premium on external funds is procyclical a property not evident in the data and not satisfied by most models of costly external finance.

Suggested Citation

Gomes, João F. and Yaron, Amir and Zhang, Lu, Asset Pricing Implications of Firms' Financing Constraints (October 2002). Simon Business School Working Paper No. 03-21; AFA 2003 Washington, DC Meetings; Twelfth Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=332181 or http://dx.doi.org/10.2139/ssrn.332181

João F. Gomes (Contact Author)

The Wharton School ( email )

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Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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National Bureau of Economic Research (NBER) ( email )

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Lu Zhang

Ohio State University - Fisher College of Business ( email )

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United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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