Equity Financing Risk

62 Pages Posted: 12 Jun 2020 Last revised: 24 Jun 2022

See all articles by Mamdouh Medhat

Mamdouh Medhat

Dimensional Fund Advisors

Berardino Palazzo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

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

Medhat, Mamdouh and Palazzo, Berardino, Equity Financing Risk (May, 2020). FEDS Working Paper No. 2020-37, Available at SSRN: https://ssrn.com/abstract=3624930 or http://dx.doi.org/10.17016/FEDS.2020.037

Mamdouh Medhat (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

HOME PAGE: http://https://sites.google.com/site/mamdouhmedhatresearch/home

Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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