External Financing and Future Stock Returns
Rodney L. White Center for Financial Research Working Paper No. 03-03
58 Pages Posted: 3 Apr 2003
Date Written: February 2003
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: Suggested Citation