Financially Constrained Stock Returns

Dmitry Livdan, Horacio Sapriza and Lu Zhang ()

No 12555, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-fin and nep-fmk
Note: AP CF EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as 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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