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Stock Comovement and Financial Flexibility
Resource type
Authors/contributors
- Huang, Teng (Author)
- Kumar, Anil (Author)
- Sacchetto, Stefano (Author)
- Vergara-Alert, Carles (Author)
Title
Stock Comovement and Financial Flexibility
Abstract
We develop a dynamic model of corporate investment and financing, in which shocks to the value of collateralizable assets generate variation in firms’ debt capacity. We show that the degree of similarity among firms’ financial flexibility forecasts cross-sectional variation in return correlation. We test the implications of the model with firm-level data in two empirical analyses using i) an instrumental variable approach based on shocks to the value of collateralizable corporate assets and ii) the outbreak of the COVID-19 crisis as an event study. We find that firms in the same percentile of the cross-sectional distribution of financial flexibility have 62% higher correlation in stock-return residuals than firms 50 percentiles apart.
Publication
Journal of Financial and Quantitative Analysis
Volume
59
Issue
3
Pages
1141-1184
Date
2024/05
Language
en
ISSN
0022-1090, 1756-6916
Accessed
6/17/24, 9:33 AM
Library Catalog
Cambridge University Press
Citation
Huang, T., Kumar, A., Sacchetto, S., & Vergara-Alert, C. (2024). Stock Comovement and Financial Flexibility. Journal of Financial and Quantitative Analysis, 59, 1141–1184.
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