TY  - JOUR
AU  - Gomes,Joao
AU  - Yaron,Amir
AU  - Zhang,Lu
TI  - Asset Pricing Implications of Firms' Financing Constraints
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9365
PY  - 2002
Y2  - December 2002
UR  - http://www.nber.org/papers/w9365
L1  - http://www.nber.org/papers/w9365.pdf
N1  - Author contact info:
Joao Gomes
University of Pennsylvania
Wharton School
Philadelphia, PA  19104
E-Mail: gomesj@wharton.upenn.edu

Amir Yaron
The Wharton School
University of Pennsylvania
2256 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6367
Tel: 215/898-1241
Fax: 215/898-6200
E-Mail: yaron@wharton.upenn.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  - We incorporate costly external finance in an investment-based asset pricing model and investigate whether financing frictions are quantitatively important for pricing a cross-section of expected returns. We show that common assumptions about the nature of the financing frictions are captured by a simple financing cost' function, equal to the product of the financing premium and the amount of external finance. This approach provides a tractable framework for empirical analysis. Using GMM, we estimate a pricing kernel that incorporates the effects of financing constraints on investment behavior. The key ingredients in this pricing kernel depend not only on  fundamentals', such as profits and investment, but also on the financing variables, such as default premium and the amount of external financing. Our findings, however, suggest that the role played by financing frictions is fairly negligible, unless the premium on external funds is procyclical, a property not evident in the data and not satisfied by most models of costly external finance.
ER  -