Costly External Finance: Implications for Capital Markets Anomalies
In a frictionless world, investment is perfectly elastic to changes in the discount rate. With financial frictions, investment is less elastic, meaning that a given magnitude of change in investment is associated with a higher magnitude of change in the discount rate. Equivalently, investment is a more powerful predictor of future stock returns. Consistent with this prediction, we document that the asset growth, external finance, and accrual anomalies in the cross-section of stock returns are much stronger in financially more constrained firms than in financially less constrained firms. Further tests show that this effect of financial constraints is distinct from the effect of financial distress and the effect of limits of arbitrage on the magnitude of the anomalies.
|Date of creation:||Sep 2008|
|Date of revision:|
|Note:||AP CF EFG|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Owen Lamont & Christopher Polk & Jesus Saa-Requejo, .
"Financial Constraints and Stock Returns.","
CRSP working papers
451, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Gilchrist, Simon & Himmelberg, Charles P., 1995.
"Evidence on the role of cash flow for investment,"
Journal of Monetary Economics,
Elsevier, vol. 36(3), pages 541-572, December.
- Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
- Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
- Simon Gilchrist & Charles P. Himmelberg, 1993. "Evidence on the role of cash flow for investment," Finance and Economics Discussion Series 93-7, Board of Governors of the Federal Reserve System (U.S.).
- Yuhang Xing, 2008. "Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1767-1795, July.
- Murillo Campello & Long Chen, 2010. "Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1185-1198, 09.
- Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006.
"Investment Behavior, Observable Expectations, and Internal Funds,"
American Economic Review,
American Economic Association, vol. 96(3), pages 796-810, June.
- Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.).
- Cummins, Jason & Hassett, Kevin & Oliner, Stephen, 1997. "Investment Behavior, Observable Expectations and Internal Funds," Working Papers 97-30, C.V. Starr Center for Applied Economics, New York University.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994.
"Market Underreaction to Open Market Share Repurchases,"
NBER Working Papers
4965, National Bureau of Economic Research, Inc.
- Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
- Lorenzo Garlappi & Hong Yan, 2011. "Financial Distress and the Cross‐section of Equity Returns," Journal of Finance, American Finance Association, vol. 66(3), pages 789-822, 06.
- Heitor Almeida & Murillo Campello, 2006. "Financial Constraints, Asset Tangibility, and Corporate Investment," NBER Working Papers 12087, National Bureau of Economic Research, Inc.
- Evgeny Lyandres & Le Sun & Lu Zhang, 2008. "The New Issues Puzzle: Testing the Investment-Based Explanation," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2825-2855, November.
- Cooper, Ilan & Priestley, Richard, 2011. "Real investment and risk dynamics," Journal of Financial Economics, Elsevier, vol. 101(1), pages 182-205, July.
- Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987.
"Financing Constraints and Corporate Investment,"
NBER Working Papers
2387, National Bureau of Economic Research, Inc.
- Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 38(3), pages 243-267, July.
- Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, 04.
- Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004.
"Capital Investments and Stock Returns,"
Journal of Financial and Quantitative Analysis,
Cambridge University Press, vol. 39(04), pages 677-700, December.
- Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
- Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
- Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
- Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
- Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
- Christopher Polk & Paola Sapienza, 2009. "The Stock Market and Corporate Investment: A Test of Catering Theory," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 187-217, January.
- Anil K Kashyap & Owen A. Lamont & Jeremy C. Stein, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 565-592.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14342. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.