TY  - JOUR
AU  - Li,Dongmei
AU  - Zhang,Lu
TI  - Costly External Finance: Implications for Capital Markets Anomalies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14342
PY  - 2008
Y2  - September 2008
UR  - http://www.nber.org/papers/w14342
L1  - http://www.nber.org/papers/w14342.pdf
N1  - Author contact info:
Dongmei Li
University of California, San Diego
Otterson Hall, Room 3S149
9500 Gilman Dr. #0553
La Jolla, CA 92093
E-Mail: dongmei@ucsd.edu

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  - In a frictionless world, investment is perfectly elastic to changes in the discount rate. With financial frictions, investment is less elastic, meaning that a given magnitude of change in investment is associated with a higher magnitude of change in the discount rate. Equivalently, investment is a more powerful predictor of future stock returns. Consistent with this prediction, we document that the asset growth, external finance, and accrual anomalies in the cross-section of stock returns are much stronger in financially more constrained firms than in financially less constrained firms. Further tests show that this effect of financial constraints is distinct from the effect of financial distress and the effect of limits of arbitrage on the magnitude of the anomalies.
ER  -