Costly External Finance: Implications for Capital Markets Anomalies / Dongmei Li, Lu Zhang.

Format:

Book

Author/Creator:

Li, Dongmei.

Contributor:

National Bureau of Economic Research.

Zhang, Lu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14342.

NBER working paper series no. w14342

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Costly External Finance

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

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.

Notes:

Print version record

September 2008.