Financially Constrained Stock Returns

48 Pages Posted: 27 Apr 2004

See all articles by Dmitry Livdan

Dmitry Livdan

University of California, Berkeley

Horacio Sapriza

Board of Governors of the Federal Reserve System

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2006

Abstract

More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market. Further, because the stochastic discount factor makes capital investment more procyclical, financial constraints are more binding in economic booms. These insights arise from two dynamic models. In Model 1, firms face dividend nonnegativity constraints without any access to external funds. In Model 2, firms can retain earnings, raise debt and equity, but face collateral constraints on debt capacity. Despite their diverse structures, the two models share largely similar predictions.

Keywords: Financial constraints, debt capacity, stochastic discount factor, expected returns

JEL Classification: E44, G12, G31, G32

Suggested Citation

Livdan, Dmitry and Sapriza, Horacio and Zhang, Lu, Financially Constrained Stock Returns (July 2006). Simon Business School Working Paper No. FR 04-07; Ross School of Business Paper No. 1048; AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=535082 or http://dx.doi.org/10.2139/ssrn.535082

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

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

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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