Asset Pricing Implications of Firms' Financing Constraints

43 Pages Posted: 6 Dec 2005

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Lu Zhang, 张橹

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

Multiple version iconThere are 5 versions of this paper

Abstract

We use a production-based asset pricing model to investigate whether financial market imperfections are quantitatively important for pricing the cross-section of returns. Specifically, we use GMM to explore the stochastic Euler equation restrictions imposed on asset returns by optimal investment behavior. Our methods allow us to identify the impact of financial frictions on the stochastic discount factor with cyclical variations in cost of external funds. We find that financing frictions provide a common factor that can improve the pricing of the cross section of stock returns. In addition, we find that the shadow cost of external funds exhibits strong procyclical variation so that financial frictions are more important when economic conditions are relatively good.

Keywords: Financing constraints, production-based asset pricing, structural estimation, cyclicality, the cross-section of returns

JEL Classification: E13, E22, E32, E44, G12, G31, G32

Suggested Citation

Gomes, João F. and Yaron, Amir and Zhang, Lu, Asset Pricing Implications of Firms' Financing Constraints. Review of Financial Studies, August 2005. Available at SSRN: https://ssrn.com/abstract=858584

João F. Gomes (Contact Author)

The Wharton School ( email )

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Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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National Bureau of Economic Research (NBER) ( email )

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Lu Zhang

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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