Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns |
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Authors: | MURILLO CAMPELLO LONG CHEN |
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Institution: | 1. Murillo Campello is the Alan J. and Joyce D. Baltz Professor of Finance in the Finance Department at the University of Illinois (E‐mail: campello@uiuc.edu).;2. Long Chen is an Associate Professor of Finance in the Olin Business School at Washington University in St. Louis (E‐mail: lchen29@wustl.edu). |
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Abstract: | Using comprehensive firm‐ and aggregate‐level data, this paper studies the real and financial implications of capital market imperfections. We first examine whether financially constrained firms' business fundamentals (capital spending and operating earnings) are more sensitive to macroeconomic movements than unconstrained firms' fundamentals. We then examine whether financial constraint “return factors” respond to macroeconomic shocks in tandem with the responses from business fundamentals. The evidence in this paper points to financial constraints affecting both fundamental quantities and asset returns. |
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Keywords: | E44 E32 G12 financial constraints macroeconomic shocks systematic risk equity returns |
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