TY  - JOUR
AU  - Livdan,Dmitry
AU  - Sapriza,Horacio
AU  - Zhang,Lu
TI  - Financially Constrained Stock Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12555
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12555
L1  - http://www.nber.org/papers/w12555.pdf
N1  - Author contact info:
Dmitry Livdan
Haas School of Business
UC, Berkeley
545 Student Services #1900
Berkeley, CA
94720-1900
E-Mail: livdan@haas.berkeley.edu

Horacio Sapriza
Board of Governors of the Federal Reserve System
and
Rutgers Business School
E-Mail: horacio.sapriza@frb.gov

Lu Zhang
Fisher College of Business
The Ohio State University
2100 Neil Avenue
Columbus, OH 43210
Tel: 585-267-6250
E-Mail: zhanglu@fisher.osu.edu
AB  - 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.
ER  -