Financial Constraints and Stock Returns

Lamont, Owen A.; Polk, Christopher; Saá-Requejo, Jesús

doi:10.1093/rfs/14.2.529

Cited by 985 publications

(541 citation statements)

References 27 publications

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“…For example, financial constraints include inability to borrow or credit constraints. It can be also seen as the inability to issue equity or illiquidity of assets (Lamont et al, 2001). Financial constraint is caused by the gap between the external and internal cost of capital, which may, among other factors, be due to agency costs and information asymmetry from an imperfect market (Kaplan and Zingales, 1997).…”

Section: ⅱ Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Corporate Social Responsibility and Financial Constraints: Evidence from Korean Firms

Kwak¹,

Bong²

2015

Glob Bus Financ Rev

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A B S T R A C TThis paper examines the relationship between corporate social responsibility (CSR) and corporate financial constraints by using a sample 1,584 firm-years of Korea during 2002-2011. We measure corporate social responsibility by both an equal-weighted CSR index and a stakeholder-weighted CSR index suggested by Akpinar et al.(2008) and Choi et al.(2010). Corporate financial constraints are measured by KZ index suggested by Kaplan and Zingales(1997). We find a negative and significant relationship between corporate financial constraints and the stakeholder-weighted CSR index, but not the equal-weighted CSR index. This finding implies that only CSR strategies with which stakeholders are prioritized can provide a positive impact upon the firm's ability to access finance in capital market.

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Section: ⅱ Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Corporate Social Responsibility and Financial Constraints: Evidence from Korean Firms

Kwak¹,

Bong²

2015

Glob Bus Financ Rev

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“…Following Lamont, Polk and Saa-Requejo (2001) and Baker, Stein and Wurgler (2003), we construct the fivevariable KZ index for each firm-year as the following linear combination:…”

Section: B Financing Constraint Proxiesmentioning

confidence: 99%

“…In particular, we use the measures advocated by Kaplan and Zingales (1997), Lamont, Polk and Saa-Requejo (2001), Baker, Stein and Wurgler (2003). 4 The first and closest to our theory is stock repurchases (relative to dollar turnover or market capitalization) since our model emphasizes the ability of firms to execute share repurchases to counter liquidity shocks.…”

Section: Introductionmentioning

confidence: 99%

Firms as buyers of last resort

Hong

Wang²,

2008

Journal of Financial Economics

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Abstract:We develop a model to explore the asset pricing implications of firms being buyers of last resort for their own stocks. Those with more ability to repurchase shares when prices drop far below fundamental value (i.e., less financially constrained ones) should have lower short-horizon return variance (controlling for fundamental variance) than other firms. Using standard proxies for financing constraints such as past repurchases, firm age and the Kaplan and Zingales (1997) index, we find strong support for this predicted relation. Moreover, our theory predicts that this relation should be stronger in environments where repurchases are legally easier to execute. Consistent with our theory, we find that this relation is indeed stronger in the U.S. after 1982 when regulatory reforms lowered the legal cost of conducting repurchases; and among the ten largest stock markets in the world, they are stronger in countries where share repurchases are legally easier to execute. ______________________ We thank an anonymous referee and

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“…The accrual factor-mimicking portfolio, CMA (Conservative Minus Aggressive), is formed by taking a long position on 5 In the language of statistics, a strategy of testing factors sequentially creates a danger of model overfitting, unless care is taken to verify that a proposed factor is actually risky enough (comoves with aggregate consumption growth enough) to explain its return premium. 6 Other applications and extensions of these methods include Carhart (1997), Davis, Fama, and French (2000), Daniel, Titman, and Wei (2001), Pastor and Stambaugh (2000), Lamont, Polk, and Saa-Requejo (2001), and Moskowitz (2003).…”

Section: Introductionmentioning

confidence: 99%

The Accrual Anomaly: Risk or Mispricing?

2012

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We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional accrual factor captures the accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings favor a behavioral explanation for the accrual anomaly.Keywords: Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention JEL Classification: M41, M43, G12, G14We thank Nai-Fu Chen, Kent Daniel, Bruce Johnson, Mort Pincus, Sheridan Titman, Yinglei Zhang, and workshop participants at Georgetown University, University of California-Berkeley, University of California-Irvine, and University of Iowa for very helpful comments. IntroductionOver the last decade, a large body of research has explored the accrual anomaly-the finding that firms with high operating accruals earn lower average returns than firms with low operating accruals, both in the U.S. (Sloan 1996) and in several other countries (Pincus, Rajgopal, and Venkatachalam (2005)). A conventional explanation for this effect is that the higher average returns for low accrual firms are compensation for higher systematic risk. In the multi-factor asset pricing models such as those of Merton (1973) and Ross (1976), security expected returns are increasing with the loadings ("betas") on multiple factors (not just the market, as in the CAPM). To explain the accrual anomaly in such models would require that the level of a firm's accruals be associated with the covariances of its returns with one or more aggregate risk factors. Specifically, low accrual firms would need to have sufficiently high loadings on priced systematic factors to justify their higher returns.An alternative explanation for the accrual anomaly is that the stock market is inefficient, and that investors naively fail to distinguish between the different forecasting power of the accruals and cash flow components of earnings for future earnings. In consequence, they are too optimistic about firms with high accruals and too pessimistic about firms with low accruals, implying irrationally high prices for high accrual firms and low prices for low accrual firms. High accrual firms therefore earn low abnormal returns and low accrual firms earn high abnormal returns.The accrual anomaly raises two important questions. First, is there common variation in stock returns related to accruals? In other words, do prices of high and low accrual firms comove, so that there is systematic risk associated with accruals? In a rational 2 frictionless market, such comovement is a necessary condition for the accrual anomaly to derive from risk. We find that an accrual factor-mimickin...

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Financial Constraints and Stock Returns

Cited by 985 publications

References 27 publications

Corporate Social Responsibility and Financial Constraints: Evidence from Korean Firms

Corporate Social Responsibility and Financial Constraints: Evidence from Korean Firms

Firms as buyers of last resort

The Accrual Anomaly: Risk or Mispricing?

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