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Review of Financial Studies Vol. 32 No. 9 2019

External Equity Financing Shocks, Financial Flows, and Asset Prices

Frederico Belo1; Xiaoji Lin2; Fan Yang3

1 INSEAD, University of Minnesota, and National Bureau of Economic Research · 2 Carlson School of Management, University of Minnesota · 3 School of Business, University of Connecticut

Abstract

We develop a dynamic model with time variation in external equity financing costs and show that variation in these costs is important for the model to quantitatively capture the joint dynamics of firms’ asset prices, real quantities, and financial flows in the U.S. economy. Growth firms and high investment firms are less risky in equilibrium, because they can substitute more easily debt financing for equity financing when it becomes more costly to raise external equity, which are high marginal utility states. Using a model-implied proxy of aggregate equity issuance cost shocks, we provide empirical support for the model’s economic mechanism. Received August 7, 2017; editorial decision September 24, 2018 by Editor Stijn Van Nieuwerburgh.

DOI
10.1093/rfs/hhy128
Volume
32
Issue
9
Pages
3500-3543
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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