Costly External Equity: Implications for Asset Pricing Anomalies

Dongmei Li, Erica X. N. Li, Lu Zhang

NBER Working Paper No. 14342
Issued in September 2008
NBER Program(s):   AP    CF    EFG

---- Abstract -----

We document that the value, net stock issues, investment, and asset growth anomalies tend to be stronger in financially more constrained firms than in less constrained firms. This effect of financial constraints is distinct from that of financial distress on anomalies. Intuitively, costly external finance makes marginal costs of investment more sensitive to investment in more constrained firms, giving rise to a stronger negative correlation between investment and the discount rate.

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