External Financing and Future Stock Returns

Rodney L. White Center for Financial Research Working Paper No. 03-03

58 Pages Posted: 3 Apr 2003

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: February 2003

Abstract

We develop a comprehensive and parsimonious measure of the extent to which a firm is raising (distributing) capital from (to) capital market participants. We show that the relation between our measure of net external financing and future stock returns is stronger than has been documented in previous research focusing on individual categories of financing transactions. Decompositions of our measure reveal additional insights. First, the weaker results of previous research are attributable to 'refinancing' transactions having no change on net external financing. Second, after controlling for refinancing transactions, there is a consistently strong and negative relation between all major categories of external financing transactions and future stock returns. Third, the negative relation between external financing and future stock returns is most consistent with a combination of over-investment and aggressive accounting.

Keywords: External financing, Capital structure, Capital markets, Market efficiency

JEL Classification: G14, G32, M41, M43

Suggested Citation

Richardson, Scott Anthony and Sloan, Richard G., External Financing and Future Stock Returns (February 2003). Rodney L. White Center for Financial Research Working Paper No. 03-03. Available at SSRN: https://ssrn.com/abstract=383240 or http://dx.doi.org/10.2139/ssrn.383240

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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