Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns


  • We thank Adam Ashcraft, Dan Bernhardt, Charlie Hadlock, Naveen Khanna, Chris Polk, Mark Schroeder, and Lu Zhang for their useful suggestions. Comments from seminar participants at the American Finance Association Meetings (2006), Michigan State University, and the University of Illinois are also appreciated. Special thanks go to Debbie Lucas (the Editor) for her tremendous help in guiding us toward improving the paper. The usual disclaimer applies.


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.