Stock Comovement and Financial Flexibility

34 Pages Posted: 25 Oct 2019

See all articles by Anil Kumar

Anil Kumar

Aarhus University, Department of Economics & Business Economics; Danish Finance Institute

Stefano Sacchetto

IESE Business School

Carles Vergara-Alert

University of Navarra - IESE Business School

Date Written: October 16, 2019

Abstract

We develop a dynamic model of corporate investment and financing, in which shocks to the value of collateralizable corporate real estate assets generate variation in firms' debt capacity. We show that the degree of similarity among firms' financial flexibility forecasts cross-sectional variation in return correlation. We test the implications of the model and find that the correlation among stocks in the top-percentile portfolio according to the similarity of financial flexibility is 1.5% higher than the correlation among stocks in the median portfolio. This link is stronger for firms with more investment opportunities, for older firms, and during periods of increasing real estate prices. Our results are robust to multivariate analyses that control for exposure to systematic return factors and several dimensions of similarity across firms.

Keywords: Return Comovement, Financial Flexibility, Real Estate Assets, Collateral

JEL Classification: G12, G32, R3

Suggested Citation

Kumar, Anil and Sacchetto, Stefano and Vergara-Alert, Carles, Stock Comovement and Financial Flexibility (October 16, 2019). Available at SSRN: https://ssrn.com/abstract=3470759 or http://dx.doi.org/10.2139/ssrn.3470759

Anil Kumar (Contact Author)

Aarhus University, Department of Economics & Business Economics ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

Danish Finance Institute ( email )

Stefano Sacchetto

IESE Business School ( email )

08034 Barcelona
Spain
+34 93 253 6461 (Phone)

Carles Vergara-Alert

University of Navarra - IESE Business School ( email )

Av. Pearson 21
Barcelona, 08034
Spain
+34 932544200 (Phone)
+34 932534343 (Fax)

HOME PAGE: http://web.iese.edu/cvergara/

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