NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Constraints and Stock Returns

Owen Lamont, Christopher Polk, Jesus Saa-Requejo

NBER Working Paper No. 6210
Issued in October 1997
NBER Program(s):   AP   ME

We test whether the impact of financial constraints on firm value is observable in asset" returns. We form portfolios of firms based on observable characteristics related to financial" constraints, and test for common covariation in the stock returns of these firms. Using several" different measures of financial constraints, we find that financially constrained firms' stock" returns move together over time. This financial constraint factor in stock returns is related to not well explained by, other empirically identified factors in asset returns. Constrained firms" have remarkably low returns in our sample period of 1968-1995, both unconditionally and in the" context of empirical asset pricing models. Financial constraint returns help explain returns" following initial public offerings and dividend omissions. We find only limited support for the" hypothesis that the relative performance of financially constrained firms reflects monetary" policy, credit conditions, and business cycles.

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Document Object Identifier (DOI): 10.3386/w6210

Published: Lamont, O., C. Polk and J. Saa-Requejo. "Financial Constraints And Stock Returns," Review of Financial Studies, 2001, v14(2,Jun), 529-554.

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