Board of Governors of the Federal Reserve System
NBER Working Papers and Publications
|October 2006||Financially Constrained Stock Returns|
with Dmitry Livdan, Lu Zhang: w12555
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.
Published: Dmitry Livdan & Horacio Sapriza & Lu Zhang, 2009.
"Financially Constrained Stock Returns,"
Journal of Finance,
American Finance Association, vol. 64(4), pages 1827-1862, 08.
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