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Journal of Finance Vol. 64 No. 2 2009

Financial Constraints, Debt Capacity, and the Cross‐section of Stock Returns

Jaehoon Hahn1; Hangyong Lee2

1 Department of Business Administration · 2 Hahn is with Yonsei School of Business, Yonsei University. Lee is with College of Economics and Finance, Hanyang University. We thank Heitor Almeida, Murillo Campello, Lauren Cohen (FMA discussant), Pete Frost, Alan Hess, Avi Kamara, Jon Karpoff, Leonardo Madureira (EFA discussant), Paul Malatesta,

Abstract

Building on a model of corporate investment under collateral constraints, we develop and test a hypothesis on the differential effect of debt capacity on stock returns across financially constrained and unconstrained firms. Consistent with the hypothesis, we find that debt capacity is a significant determinant of stock returns only in the cross‐section of financially constrained firms, after controlling for beta, size, book‐to‐market, leverage, and momentum. The findings suggest that cross‐sectional differences in corporate investment behavior arising from financial constraints, predicted by theories of imperfect capital markets and supported by empirical evidence, are reflected in the stock returns of manufacturing firms.

DOI
10.1111/j.1540-6261.2009.01452.x
Volume
64
Issue
2
Pages
891-921
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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