Equity Financing Risk
62 Pages Posted: 12 Jun 2020 Last revised: 24 Jun 2022
Date Written: May, 2020
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity ﬁnancing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a signiﬁcant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones related to R&D expenditures and cash-based operating proﬁtability.
Keywords: Equity returns, R&, D, Factor models, equity issuances, Financing constraints
JEL Classification: G12, G31, G35
Suggested Citation: Suggested Citation