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Financial constraints and asset pricing: comprehensive evidence from London Stock Exchange

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  • Nikolaos Balafas
  • Alexandros Kostakis

Abstract

This study provides comprehensive evidence on the pricing of financial constraints (FC) risk on London Stock Exchange during the period 1988–2013. Utilizing a large number of proxies for FC, we find that investors are not compensated with higher premia for holding shares of financially constrained firms. To the contrary, in most of the cases, the most constrained firms significantly underperform, both statistically and economically, the least constrained ones. Focussing on the Whited–Wu index to construct a zero-cost FC factor that goes long the most constrained firms and sells short the least constrained ones, we find that this factor carries a significantly negative premium and it is priced in the cross-section over and above the commonly used risk factors.

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  • Nikolaos Balafas & Alexandros Kostakis, 2017. "Financial constraints and asset pricing: comprehensive evidence from London Stock Exchange," The European Journal of Finance, Taylor & Francis Journals, vol. 23(1), pages 80-110, January.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:80-110
    DOI: 10.1080/1351847X.2015.1115773
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    Cited by:

    1. Min-Rui Choo & Chih-Wei Wang & Chi Yin & Jie-Lun Li, 2021. "Managerial Ability and External Financing," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(2), pages 207-241, June.

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